Establishing and

Allocating
the Promotional
Budget
Prof. S. G. Joshi,
DVH IMSR, Vidyagiri,
Dharwad.
 Promotion Budget
Promotion Budget is basically a quantitative expression of the amount
of money that has to be spent for advertising in the coming period.
• It is an estimate of the funds needed for meeting advertising
objectives of the firm that are developed in line to the company’s
objectives, vision and mission.
• It also involves allocation of monetary resources among different
kinds of advertising plans, media, sales territories, products and
selling activities etc.
This clearly depicts how, where, and for what purposes the funds
would be appropriated and utilized.
DVH IMSR, Vidyagiri, Dharwad
• While it is one of the most critical decisions, budgeting has perhaps been the
most resistant to change. A comparison of advertising and promotional texts
over the past 20 years would reveal the same methods for establishing
budgets. Advertisers also use an approach based on contribution margin—the
difference between the total revenue generated by a brand and its total
variable costs. But, marginal analysis and contribution margin are essentially
synonymous terms.
• The size of a firm’s advertising and promotions budget can vary from a few
thousand dollars to more than a billion.
• While establishing objectives is an important part of the planning process, the
limitations of the budget are important too. No organization has an unlimited
budget, so objectives must be set with the budget in mind.

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 Budget Setting Approaches:
1. Marginal Analysis
As advertising/promotional  expenditures increase, sales and gross margins also increase to a
point, but then they level off. Profits are shown to be a result of the gross margin minus
advertising  expenditures. Using this theory to establish its budget, a  firm would continue to
spend advertising/promotional dollars  as long as the marginal revenues created by these
expenditures exceeded the incremental  advertising/promotional costs. The optimal
expenditure level is the point where marginal costs equal the marginal revenues they
generate. While marginal analysis seems logical intuitively, certain weaknesses limit its
usefulness. These weaknesses include the assumptions that
(1) sales are a direct result of advertising and promotional expenditures and this effect can be
measured and
(2) advertising and promotion are solely responsible for sales.
DVH IMSR, Vidyagiri, Dharwad
As advertising/promotional expenditures increase, sales and gross
margins also increase to a point, but then they level off. Profits are
shown to be a result of the gross margin minus advertising
expenditures.
DVH IMSR, Vidyagiri, Dharwad
Using this theory to establish its budget, a firm would continue to
spend advertising/promotional dollars as long as the marginal revenues
created by these expenditures exceeded the incremental
advertising/promotional costs. As shown on the graph, the optimal
expenditure level is the point where marginal costs equal the marginal
revenues they generate (point A). If the sum of the
advertising/promotional expenditures exceeded the revenues they
generated, one would conclude the appropriations were too high and
scale down the budget. If revenues were higher, a higher budget might
be in order.

DVH IMSR, Vidyagiri, Dharwad

While marginal analysis seems logical intuitively, certain weaknesses limit
its usefulness. These weaknesses include the assumptions that
(1) Sales are a direct result of advertising and promotional expenditures
and this effect can be measured
(2) Advertising and promotion are solely responsible for sales.

DVH IMSR, Vidyagiri, Dharwad

 Assumption that sales are a direct measure
of advertising and promotions efforts.

• The advertiser needs to set communications objectives that

contribute to accomplishing overall marketing objectives but at
the same time are separate.
• One reason for this strategy is that it is often difficult, if not
impossible, to demonstrate the effects of advertising and promotions
on sales.
• A more logical approach would be to examine the impact of various
budgets on the attainment of communications objectives.

DVH IMSR, Vidyagiri, Dharwad

Conclusion
• Sales are not the only goal of the promotional effort .

Awareness, interest, attitude change, and other communications

objectives are often sought, and while the bottom line may be to sell
the product, these objectives may serve as the basis on which the
promotional program is developed.

DVH IMSR, Vidyagiri, Dharwad

Sales Response Models
• The relationship between advertising and sales has been the topic of
much research and discussion designed to determine the shape of the
response curve.

• Almost all advertisers subscribe to one of two models of the

advertising/sales response function: the concave-downward function
or the S-shaped response curve.

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The concave-downward function

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• After reviewing many studies of the effects of advertising on sales, Julian
Simon and Johan Arndt concluded that the effects of advertising budgets
follow the microeconomic law of diminishing returns.
• The amount of advertising increases, its incremental value decreases
• The logic is that those with the greatest potential to buy will likely act on
the first (or earliest) exposures, while those less likely to buy are not likely
to change as a result of the advertising. For those who may be potential
buyers, each additional ad will supply little or no new information that will
affect their decision.
• Thus, according to the concave-downward function model, the effects of
advertising quickly begin to diminish, as shown in Figure. Budgeting under
this model suggests that fewer advertising dollars may be needed to create
the optimal influence on sales.

DVH IMSR, Vidyagiri, Dharwad

The S-shaped response function

DVH IMSR, Vidyagiri, Dharwad

• Many advertising managers assume the S-shaped response curve , which
projects an S shaped response function to the budget outlay (again measured
in sales). Initial outlays of the advertising budget have little impact (as
indicated by the essentially flat sales curve in range A). After a certain budget
level has been reached (the beginning of range B), advertising and
promotional efforts begin to have an effect, as additional increments of
expenditures result in increased sales.
• This incremental gain continues only to a point, however, because at the
beginning of range C additional expenditures begin to return little or nothing
in the way of sales.
• This model suggests a small advertising budget is likely to
have no impact beyond the sales that may have been generated through
other means (for example, word of mouth)

DVH IMSR, Vidyagiri, Dharwad

At the other extreme, more does not necessarily mean better: Additional
dollars spent beyond range B have no additional impact on sales and for
the most part can be considered wasted. As with marginal analysis, one
would attempt to operate at that point on the curve in area B where the
maximum return for the money is attained.

DVH IMSR, Vidyagiri, Dharwad

Additional Factors in Budget
Setting
• Product Factors
• Market Factors
• Customer Factors
• Strategy Factors
• Cost Factors

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DVH IMSR, Vidyagiri, Dharwad
 Approaches of Setting
Advertising Budget
There are various methods used in developing an
advertising budget which can be categorized in
two groups,
• Top Down Approach and
• Build Up Approaches.

DVH IMSR, Vidyagiri, Dharwad

 Top Down Approach

Executive level determines the limit of

spending or money allotted for advertising.

Within the limit the promotion budget is

set.
DVH IMSR, Vidyagiri, Dharwad
In Top down approach the budgetary amount is fixed first at executive level
or top management level within a limit allotted for advertising and then it
passes down to various departments for making the budget.

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 Build Up Approaches
Promotional or advertising objectives are determined

Planning is done to determine the activities needed to achieve objectives.

Cost of promotional activities estimated

Approval by top management

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Build up (Bottom up) approach is adopted when the top down approach
cannot be used for budgeting or the pre determined budget limit does not
associate it to the objectives and strategies designed to achieve them. In
such a situation the top-level approval is taken at the end after preparing
the budget.
Bottom up budgeting approach basically involves four basic steps i.e.
advertising objectives should be clearly determined, planning should be
based on the objectives determined, cost estimation and finally the
approval of the top management.

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 Top down approaches: Methods
• Affordable Method
• Arbitrary Method
• Market Share Method
• Percentage of Sales Method
• Fixed-Sum-Per-Unit Method
• Competitive Parity Method
• Return on Investment

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Affordable Method:
This is also known as Funds Available method. It basically implies allocation of advertising
budget on the basis of what advertisers can afford to spend. When sales decrease, the
firms may not have funds available for advertising appropriation. Hence after covering the
company’s relevant expenditure, whatever is left is allocated to advertising expenditure,
presuming that the firm can afford to spend the balance amount of money on advertising
expenditure.

This is the simple method of determining advertising budget. Firms use this method on
analyzing how much money is left with them after reducing operational costs, dividend
payments and considering the other budgets.
Many small business firms focus on this method as they invest money in all other
operational activity and lastly left with small amount of money. Therefore, less amount of
money left for execution of promotional and advertising tasks.

DVH IMSR, Vidyagiri, Dharwad

Affordable method- Advantages
• It is very simple method of determining advertising budget.
• This method helps avoiding overspending on advertising and keeps
the budget well within affordable limits.
• It will also help in putting a foot forward in eliminating the social
wastage.

DVH IMSR, Vidyagiri, Dharwad

Affordable method-
Disadvantages
• It can be prepared for short range plans only since it would lead to an
uncertain annual advertising budget.
• It is not logical as it is based on affordability of the firm instead of the
advertising for the firm.
• This will not help in the times of decreasing sales volume since
enough funds may not be available for advertising appropriation.

DVH IMSR, Vidyagiri, Dharwad

Arbitrary Method
• Management team determines the budget only exclusively on the
basis of what is important to them. Though they have a group
discussion to set the advertising budget yet no advantage of using a
budget is reaped, as there is an arbitrary allocation only. There is no
systematic thinking involved while setting the advertising budget, no
formalization of objective takes place for the budget and advertising
and promotional activities are ignored largely. Mostly, retailers with
local status adopt this method.

DVH IMSR, Vidyagiri, Dharwad

Arbitrary Method: Advantages
• The advertising budget is fixed as per the management’s vision. It can
help achieve the advertising objectives easily.
• The conflict between the organizational goals and advertising goals
will not arise.

DVH IMSR, Vidyagiri, Dharwad

Arbitrary Method:
Disadvantages
• Arbitrary method or allocation is weaker than affordable method.
• It is the most unscientific method, as it is not established on any
theoretical basis.
• The objectives are not formalized and no systematic thinking is
involved.

DVH IMSR, Vidyagiri, Dharwad

Market Share Method
Market share analysis method, common in market for the demand
analysis and for evaluating marketing efficiency, is adopted in allocating
funds for advertising.
• Accordingly, advertising budget is prepared with an objective of
retaining a given market share or obtain a new target share through the
money spent or allocating for spending.
• Under this method, if a firm is satisfied with its market share, it may
decide to spend the same amount or percentage that it spent
previously.

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Market Share Method-
Advantages
• The method is simple and associated with one of the objective of
advertising.
• This is a quantitative method suggesting measuring effectiveness of
advertising on the basis of market share.

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 Market Share Method-
Disadvantages
• It completely ignores quality and creativity.
• When a new product is introduced, a heavier advertising budget may
become necessary initially. It is impossible to create product
awareness without initial heavy investment.
• Similarly, the element of competition is not considered under this
approach.
• When competition is severe, larger sums are rightly spent to retain
even the existing share.

DVH IMSR, Vidyagiri, Dharwad

 Percentage of Sales method
Percentage of sales method is a very common method used for
determining advertising budget. This method is basically used in big
firms where advertising and promotional budget is based on the
product sales.
• This method basically holds the premise that the size of advertising
budget for the product varies depending upon the product sale for a
certain period.
• Under this method, a fixed percentage of the sales figure is allocated
as the advertising budget. The sales can be past sales or anticipated
sales or sales by product or territory or customer group etc.

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•  The amount of advertising spending is calculated as A/S ratio x
projected sales:

Where, A/S ratio stands for the Advertising to Sales Ratio.

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 Percentage of Sales method-
Advantages
• This method is easy to understand and simple in application. It brings
some uniformity in the system.
• Spending on advertising is directly related to the funds available to
the firm. Profit earned by the company in the last year will be
presumed as more funds available to spent on advertising in present
year.
• This approach is stable, while the budget may vary with increase or
decrease in sales, managers will have idea of the parameters of the
budget till the changes are not drastic.

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 Percentage of Sales method-
Disadvantages
• It shows the reverse relationship between sales and advertising.
• Method views sales as basis for spending on advertising than taking advertising as factor for sale.
So, the advertising budget becomes consequence of sales rather than a determinant of sales.
• Advertising budget depends upon the sales, thus the sales fluctuation makes the long range
planning difficult.
• When past sales are followed for estimating the advertising appropriations the future prediction
may not be correct since past sales may not always prove to be a correct indicator.
• This method of budgeting may result in severe mis-appropriation of funds. Advertising and
promotion plays a very important role in marketing a product, therefore allocation of more
money to advertising will generate incremental sales.
• This method does not allow any changes in strategy either internally or externally, if firm wish to
allocate more money to the advertising and promotional activity, that is not possible with this
method unless the company’s manager is keen to diverge from company standards.
DVH IMSR, Vidyagiri, Dharwad
Fixed-sum-per-unit Method
•This
  method is quite similar to the Percentage of Sales Method except
that a specific amount per units appropriated rather than a percentage
of the value of sales. The advertising appropriation may be based on
product sold in previous period or on a forecast of unit sales in future
period. This method is frequently used in advertising appropriations
for industrial products and consumer durables.

Budget Amount = Sales Volume fixed sum per unit

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Fixed-sum-per-unit Method:
Advantages
• It is simple and easy to understand.
• Advertising appropriations may remain unaltered despite price
changes.
• This method is stable.

DVH IMSR, Vidyagiri, Dharwad

Fixed-sum-per-unit Method:
Disadvantages
• This method uses sales as basis for advertising spending instead of
taking advertising as a factor for sales.
• Dependence of advertising spending on sales make the long range
planning difficult in case of fluctuations in sales.

DVH IMSR, Vidyagiri, Dharwad

 Competitive Parity Method
• This method, also known as competitive comparison method, basically involves the
adjustment of advertising budget according to the competitors advertising budget. This
is called “We-Too-Approach”. The logic of this method is that collective knowledge of
the firms in the industry will probably work in somewhere similar manner to generate
advertising budget. Therefore, the strategies, objectives and goals of all firms in the
industry are presumed to be similar.
• The marketer believes that by having the similar pattern of competitor’s allocating the
advertising budget, he will able to maintain his good market share. This method is used
as defensive device by the advertisers. This method does not consider the efficiency and
competence of an individual firm in managing its advertising activity, and situations of
individual firms are considered sufficiently unique which in no way warrant following
competitors’ practices. So, there is again the possibility of non-optimal budget
allocations for advertising as based on competition in the market.
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Competitive Parity Method-
Advantages
• This method identifies competition as an important base in the
formation of advertising budget.
• It enables a company to keep check on advertising and marketing
strategies of the competitors.
• By analyzing the competitors advertising budget the company can
determine advertising budget close to the competitors spending on
advertising. Chances of promotional wars are reduced by this method.

DVH IMSR, Vidyagiri, Dharwad

Competitive Parity Method-
Disadvantages
• The competitor’s resources, opportunities, objectives and reputation
differ so much that it may not give good estimate of what company
should spent on advertising.
• The internal and external condition of the company may change over
a period of time and there is a possibility that the company may not
be able to spend the money on advertising at optimal level.
• This method ignores factors like the level of production, advertising
objectives and sales estimate of a firm, which are very important in
shaping a real advertising budget.

DVH IMSR, Vidyagiri, Dharwad

Return on Investment
This method, also referred to as ‘rate on investment’ or ‘incremental
method’, considers advertising and promotion as investments, like plant
and equipment. Therefore, investment in the budgetary appropriation i.e.
expenditure on advertising and promotion is expected to bring certain
returns. This method measures the return in terms of increased sales on
spending advertisement appropriation in comparison to the sales on not
spending anything.

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Return on Investment-
Advantages
• The method is simple to understand and logical in terms of the basis
of measurement.
• This suggests that the basis of measurement lies in the objectives
itself. The advertiser wishes for increased sales only through spending
on advertising and promotional efforts.

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Return on Investment-
Disadvantages
• In reality this method is rarely possible to appraise the returns
provided by advertising and promotional activities, till sales continued
to be basis for evaluation.
• If managers ask for return on advertising expenditures, it remains
unanswered as it depends on the criteria used to identify
effectiveness.
• Return on investment is a difficult method to follow.

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Buildup Approaches/ Top Down Approach-
Types of Methods
Top down approaches has a major flaw that is these approaches lead
to predetermined budget appropriations that often not linked to
objectives and the strategies designed to achieve them. Therefore,
other types of budgeting methods were form such as objective & task
method, payout plan and quantitative models.
• Build approaches basically include following types of methods:
1. Objective and Task method
2. Payout Planning
3. Quantitative models

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 Objective and Task method
It basically considers advertising budget setting as a process where budget
decision are provided on the basis of advertising objectives. Specific
advertising objectives are mentioned clearly for the product and tasks to
accomplish those objectives. Advertising objectives are fixed after intensive
market research.
For example, for new cosmetic product launched in the market, the
advertising objective might be to create brand awareness among 50% of the
target consumers in a given period of time. After this, marketers identify the
tasks that must be performed to achieve these objectives.

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These tasks may include advertising through different media such as
television, radio, newspapers and magazines. The advertising cost of
each relevant task is then calculated.
This would mean calculating the costs of advertising on different
media. Also in addition to this, the cost of hiring an advertising agency,
designing the advertising copy, etc. need to be considered.
The total aggregate cost of the all tasks is then set as the proposed
advertising budget. This budget will be passed or accepted if it is
within the financial resources of the company.

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 Thus, the objective and task method involves the following steps:
• Task Definition-The objective of the advertising programme should be
defined first. These might include creating awareness, stimulate
interest, strengthens comprehension etc.
• Determining the type of media, strategy and the amount of exposure
required for efficient satisfaction of the task set.
• Estimating the cost of various elements of advertising that have been
considered.
• Deciding whether the firm can afford the budget taking into account
the financial limitation and availability of funds.

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Object and Task Method
Isolate
Isolate objectives
objectives

Determine
Determine tasks
tasks required
required

Estimate
Estimate required
required expenditures
expenditures

Monitor
Monitor

Reevaluate
Reevaluate objectives
objectives

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Objective and Task method-
Advantages
• It is more logical and objective as compared to other methods as it is
based on objectives and the tasks of the advertising that has to be
completed to achieve the objectives.
• Business conditions and competition factor also form the base for
fixing up the advertising budget.
• It does not rely on the past sales report or projected sales figure. This
method is used for new products, when advertisement develops from
the scratch.

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Objective and Task method-
Disadvantages
• If the objectives in this method were not well defined, all efforts
would go waste.
• This method fails to provide a basis for prioritizing advertising
objectives.

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 Payout Planning Method
Marketer predetermines the investment value of the advertising and
promotion approximately by developing a payout plan that also decides
how much to spend. It gives basic idea about the revenues that product
will generate as well as the expenditure it will incur in over two to three
years of time.
Based on expected rate of return, the payout plan will determine how
much expenditure will be required for advertising and promotion
activities according to which a firm can expect a good return.
It is not always perfect; it does guide the manager in establishing the
budget.

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 Quantitative Models
• These models have some limitation while establishing a budget. These methods
employ Computer simulation models involving statistical techniques such as
multiple regression analysis to determine the contribution of budget to the sales.
• Due to some problems associated with the method, its acceptance has been
limited. It’s still need to reach their potential. Such methods do have good merit
but it may require more refinement before attaining a success.
• For the most part, these methods employ computer simulation models involving
statistical techniques such as multiple regression analysis to determine the relative
contribution of the advertising budget to sales.
• Attempts to apply quantitative models to budgeting have met with limited success.
• Such methods do have merit but may need more refinement before achieving
widespread success.
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Share of Voice Effect

Share of Voice
High
Competitor’s Decrease–find
Decrease–find aa Increase
Increase to
to defend
defend
defensible
defensible niche
niche

Attack
Attack with
with large
large SOV
SOV Maintain
Maintain modest
modest
Low

premium
premium spending
spending premium
premium

Low High
Your Share of Market

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 Comparison of Advertising Budgeting Methods
Affordable Method Based on what the company can afford.
It is very simple method of determining advertising budget.
Arbitrary allocation Budget determined by the management teams without any theoretical basis.
Market share Method The budget amount is decided on the basis of retaining the same or increasing the
market share.
Percentage of sales It is basically based on percentage of current sales report or forecasted sales report.
Fixed sum per unit method It is based on specific amount per unit rather than a fixed percentage on value
Competitive parity Based on competitors advertising budget
Return on Investments Advertising and promotions are considered as investments.
Objective and task Basically based on identifying the objectives and tasks then
method estimating costs
Payout planning Marketer plan out the investment value on the advertisement activity to expect
good return from it
Quantitative Statistical techniques are used to determine the contribution of
models budget to sales.

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Organizational Characteristics
• Factors that influence advertising and promotion budgets
• The organization’s structure
• Power and politics
• The use of expert opinions
• Characteristics of the decision maker
• Approval and negotiation channels
• Pressure on senior managers to arrive
at the optimal budget

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