One of the most difficult jobs you face each year is budgeting. It's a function that requires you to predict what you'll need, what it will cost and what will be the rewards. The most frequently asked question about promotional budgeting is "how much?" The real question should be:
Q: What are the various methods for setting promotional budgets?
A: There are five different ways to establish a promotional budget.
1) The first is the most often used and it is called the "percent of sales" method. If you sell more product, you'll invest more in promotion. This is literally putting the cart before the horse.
2) More sensible, but just as limiting is the "percent of profit" method. Under this method, promotion seems to be tied to its return on investment, but again, it puts the horse in the wrong place.
3) Another budgeting option is "matching the competition." Here, one estimates what others in the industry are investing and then matches that figure. The problem with this method is that it keeps you evenly paced with the competition and prevents you from gaining on them.
4) The fourth method is a combination of the first and third. It's called the "keep pace" method. It calls for you to invest an amount proportionately equal to your competition's sales to promotion ratio. Thus, if your competitor invests 5% of sales on promotion, you would do the same.
5) The fifth, and most sophisticated method is called the "task oriented" method. As implied, the object is to achieve a task or goal. When we apply this method to our clients' programs, we start with a list of all the promotional tactics that would advance our communications strategy, citing the task it is intended to achieve. Some call this a "wish list," or "promotional menu."
We then prioritize the items on the list and assign costs to each. Once this is done we meet with our clients and determine what is really essential, what can be pared down, what can be postponed and what can be eliminated. Now we are ready to formulate the budget based on what the company can really afford to invest.
The benefit to this method is that it lets promotion be the "driving force" for your overall marketing program rather than the "necessary expense" as some may view it.