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Part Four Objectives and Budgeting for Integrated Marketing
Communications Programs
Belch: Advertising and
Promotion, Sixth Edition
Figure 7-14 Alternative
methods for computing percentage
of sales for Eve
Cologne
IV. Objectives and
Budgeting for Integrated
Marketing
Communications Programs
7. Establishing Objectives
and Budgeting for the
Promotional Program
© The McGraw−Hill
Companies, 2003
market gets tough and sales and/or profits begin to fall, this method is likely to lead to
budget cuts at a time when the budget should be increased.
Arbitrary Allocation Perhaps an even weaker method than the affordable method
for establishing a budget is arbitrary allocation, in which virtually no theoretical
basis is considered and the budgetary amount is often set by fiat. That is, the budget is
determined by management solely on the basis of what is felt to be necessary. In a discussion
of how managers set advertising budgets, Melvin Salveson reported that these
decisions may reflect “as much upon the managers’ psychological profile as they do
economic criteria.” 33 While Salveson was referring to larger corporations, the
approach is no less common in small firms and nonprofit organizations.
The arbitrary allocation approach has no obvious advantages. No systematic thinking
has occurred, no objectives have been budgeted for, and the concept and purpose
of advertising and promotion have been largely ignored. Other than the fact that the
manager believes some monies must be spent on advertising and promotion and then
picks a number, there is no good explanation why this approach continues to be used.
Yet budgets continue to be set this way, and our purpose in discussing this method is to
point out only that it is used—not recommended.
Percentage of Sales Perhaps the most commonly used method for budget setting
(particularly in large firms) is the percentage-of-sales method, in which the advertising
and promotions budget is based on sales of the product. Management determines
the amount by either (1) taking a percentage of the sales dollars or (2) assigning a fixed
amount of the unit product cost to promotion and multiplying this amount by the number
of units sold. These two methods are shown in Figure 7-14.
A variation on the percentage-of-sales method uses a percentage of projected
future sales as a base. This method also uses either a straight percentage of projected
sales or a unit cost projection. In the straight-percentage method, sales are projected
for the coming year based on the marketing manager’s estimates. The budget is a percentage
of these sales, often an industry standard percentage like those presented in
Figure 7-15.
One advantage of using future sales as a base is that the budget is not based on last
year’s sales. As the market changes, management must factor the effect of these
changes on sales into next year’s forecast rather than relying on past data. The resulting
budget is more likely to reflect current conditions and be more appropriate.
Figure 7-15 reveals that the percentage allocated varies from one industry to the
next. Some firms budget a very small percentage (for example, 0.7 percent in lumber
and wood products), and others spend a much higher proportional amount (12.0 percent
in the games and toy industry). Actual dollar amounts spent vary markedly
according to the company’s total sales figure. Thus, a smaller percentage of sales in the
construction machinery industry may actually result in significantly more advertising
dollars being spent.
Proponents of the percentage-of-sales method cite a number of advantages. It is
financially safe and keeps ad spending within reasonable limits, as it bases spending
on the past year’s sales or what the firm expects to sell in the upcoming year. Thus,
Method 1: Straight Percentage of Sales
2002 Total dollar sales $1,000,000
Straight % of sales at 10% $100,000
2003 Advertising budget $100,000
Method 2: Percentage of Unit Cost
2002 Cost per bottle to manufacturer $4.00
Unit cost allocated to advertising 1.00
2003 Forecasted sales, 100,000 units
2003 Advertising budget (100,000 × $1) $100,000