All marketing activities including promotion of products require some level of spending. The money for these promotional activities is usually set in the promotion expenditure budget.
The promotion expenditure budget is a part of the business’s Marketing Budget which is a part of a broader marketing plan of the business.
Marketing Budget is a financial plan for marketing activities for future time periods. It generally includes funds needed for activities such as market research, changing a product or its packaging, or advertising a product to consumers in order to achieve marketing objectives.
What is promotion expenditure budget?
The promotion expenditure budget the amount of finance available to a business for spending on promotion during a certain period of time in the future.
The size of the overall Marketing Budget affects the amount of money made available for promotional activities. While large businesses with a large Marketing Budget usually choose expensive television advertising, smaller businesses may only have a Marketing Budget that allows them to advertise in the local newspaper or through any other Below-The-Line Promotion (BTL) method.
Methods for selecting promotion expenditure budget
In order to set the promotion expenditure budget, the business organization can use different approaches to arriving at an appropriate amount of proposed spending.
These spending limits can be set by using a number of different approaches:
- Historical budgeting. In this type of budgeting historical budgeting figures from past years are considered, e.g. based on last year’s spending on promotion. The firm is going to use executive judgment of marketing managers and other executives to come up with future numbers. Managers can also using correlation of past marketing spending and sales levels.
- Incremental budgeting. By taking last year’s budget and previous years’ budget managers will add on a specific percentage to set new figures. The added percentage will represent sales targets, inflation rates or market growth rates. The Marketing Department will need to justify the increment that is being asked for rather than the total size of the budget each year.
- Competitor-based budgeting. This method is about matching other related businesses by spending the same amount on promotion as close competitors. Two or more businesses of approximately the same size in terms of sales will most likely have very similar promotion costs. However, just because the same amount is being spent by rival firms, it does not mean that it is equally effective. It is because one firm might have very attractive and unique Promotional Mix that is not easily matched by other businesses.
- Objective-based budgeting. This method concentrates on task budgeting for each marketing activity to be conducted – each promotional objective and each promotion task. It starts out by analyzing the sales level required in order to meet specific promotional objectives. Then, it assesses how much supporting expenditure is required to perform tasks needed to reach such targets. All those spending will then become the promotion budget.
- Percentage-of-sales budgeting. Using this approach, the business will take the percentage of sales revenue and use it as promotional spending. The amount of promotional expenditure will vary with the level of sales. When sales increase, the firm will allocate more funds for its promotional activities. And when sales decline, the amount to be spent on promotion will also decline.
- What-the-business-can-afford budgeting. Promotional budget will be as much as what the company can afford to spend after all other forecast expenses in the firm has been paid for. In this case, promotion expenditure budget will simply be set on the basis of what can be afforded. Unfortunately, this method neglects to consider market conditions as well as marketing objectives. Also, many smaller businesses often have very limited finance that is why any money that can be allocated to promotion is a luxury.
Promotion expenditure from the viewpoint of the business and its consumers
Businesses spend billions of dollars worldwide each year on all possible forms of promotion, including Above-The-Line Promotion (ATL) and Below-The-Line Promotion.
Main benefits from promotional expenditure are that promotion informs people about new products and this helps to increase competition between firms which leads to more choices and better quality of products.
Also, promotion can assist in reducing the average costs of production through economies of scale by helping to create mass markets.
Finally, promotion generates revenue for various media such as TV stations, radio stations, newspapers, magazines, websites, etc.
However, main drawbacks from promotional expenditure includes waste of resources as the money spent on promotion could have been used to lower prices for customers instead or to conserve natural resources.
Excessive advertising can become an unreasonable burden on the society as it promotes consumerism. This leads to a situation where people are judged by others based on the quantity of goods which they own. Promotion is also often used as a powerful tool to encourage consumers to spend on products that they do not really need.
How to measure the success of promotion expenditure?
It is difficult or even impossible to measure the true effectiveness of an advertising campaign. The main aim of promotion is not always to increase sales in the short-term, but to build the brand in the long-term over many years.
Successful promotion enables the business to reach the desired target audience, is attractive and appealing to the target market as well as allows not only allow new products to be launched to the market but also extends the life cycle of older products.
However, in general, how well the marketing budget is spent can be measured using effectiveness of promotion and efficiency of promotion.
- Effective. Were the marketing objectives achieved successfully?
- Efficient. Were the marketing objectives achieved at the lowest cost possible – cost-effectively? Promotion should generate more sales revenue than it costs the firm.
There are many tools and techniques in modern marketing experts that have enabled the accurate assessment of the success of all promotion campaigns:
- Sales figures before and after the promotion campaign. Conclusions about the level of sales of the product can be made by comparing how many products were sold (daily, weekly, monthly and annually) before the promotion was launched with sales during and after the promotional campaigns.
- Response rates to advertisements. In addition to sales levels, thanks to modern technology various media can make records of specific customer behaviors online. Websites can record the number of visits and the number of visitors; video-sharing websites can record the number of times the advert has been viewed; and even newspapers adverts have tear-off slips to request more details.
- Consumer awareness data. When customers reply to questions concerning the advertisements they have seen and responded to this will give the business or a market research agency which works for the business to get the results of consumer ‘recall’ or awareness. This information provides rapid feedback on the progress of a promotional campaign, whether the advertisements have been seen and remembered. Consumer panels can also be conducted to get qualitative feedback on the impact of promotions and the effectiveness of advertisements.
Whatever the original objective of a promotional campaign is, it is crucial for the business to assess the degree of success.
In summary, budgets are financial plans for future time periods and promotional expenditure budget is a plan for the firm’s spending on promotion.
A business needs to know that its marketing budget was spent cost-effectively and the main way of checking the effectiveness is to see, if it the business has achieved the marketing objectives. It is because spending very large amounts of money on promotion does not always guarantee the success of a product.
An most importantly, the promotion has to match the marketing objectives and integrate well with the rest elements of the Marketing Mix.
