What is establishing and allocating the promotional budget?

What is establishing and allocating the promotional budget?

• Answer:

  ESTABLISHING AND ALLOCATING THE PROMOTIONAL BUDGET As noted in the text, the budgeting decision is not a trivial matter. Whether the firm is spending millions of dollars or thousands, this decision will have a direct impact on the success of the communications program. As can be seen by examining the decision sequence model presented in Chapter 1, budgeting decisions are not made in isolation. These decisions require an interactive process in which the communications objectives must be taken into consideration. Likewise, the budget directly impacts the promotional mix strategies that are to be developed. Thus, both the size of the budget, and the way that it will be allocated must be given much attention A. Establishing the Budget 1. Theoretical issues in budget setting—most of the models used to establish advertising budgets can be categorized as taking an advertising or sales response perspective. In this section we discuss some of these. a. Marginal analysis—Figure 7-9 in the text illustrates the concept of marginal analysis. As the figure indicates, as advertising/promotional efforts increase, sales and gross margins will also increase to a point and then level off. In using marginal analysis, the firm would continue to spend promotional dollars so long as the marginal revenues created by these expenditures exceeded the incremental costs. When the dollar expenditures exceed the returns, the budget should be scaled back. In other words, the optimal budget would be at that point where marginal revenues are equal to marginal costs, or where mr = mc. While this economic model seems logical intuitively, in fact, there are two major weaknesses that limit its applicability: (1) The assumption that sales are a direct measure of advertising and promotions efforts, and (2) the assumption that sales are determined solely by advertising and promotions. b. Sales response models—two budgeting models based on sales response are discussed in the text. The first of these—the concave-downward function—is based on the microeconomic theory of the law of diminishing returns. Essentially, the model states that as the amount of advertising expenditures increases, its incremental value decreases. The basic argument is that those most likely to buy the product are likely to do so as a result of the earliest exposures. Additional exposures are not likely to increase the probability of their purchasing, nor is it likely to have an effect on those who are undecided or unlikely to buy. Thus, the effects of advertising would rapidly diminish. The second model—the S-shaped response function—takes a very different approach. In this model, it is argued that initial outlays of promotional dollars will have very little impact on sales. As indicated in Exhibit 7-10, in Range B an impact will begin to be noticed, carrying through to Range C, where additional expenditures have again very little impact. This S-shaped curve suggests that there are incremental values to be accrued from additional dollar outlays, but only to a point. For example, it would be argued that a certain level of expenditures is necessary to make an impact. However, after a certain point (beginning of Range C) these dollars are unlikely to be of value. In other words, no matter how much I spend, if you don’t want the product, advertising isn’t going to make you buy. As with marginal analysis, the marketer would want to establish the budget at the point where s/he gets the optimal value for the outlay. c. Additional factors considered in budget setting—In addition to considering the theoretical aspects of budget setting, a number of other factors must be taken into consideration including: situational factors; customer factors; the competitive environment; etc.