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Belch: Advertising and
Promotion, Sixth Edition
IV. Objectives and
Budgeting for Integrated
Marketing
Communications Programs
7. Establishing Objectives
and Budgeting for the
Promotional Program
there will be sufficient monies to cover this budget, with increases in sales leading to
budget increases and sales decreases resulting in advertising decreases. The percentage-of-sales
method is simple, straightforward, and easy to implement. Regardless of
which basis—past or future sales—is employed, the calculations used to arrive at a
budget are not difficult. Finally, this budgeting approach is generally stable. While the
budget may vary with increases and decreases in sales, as long as these changes are
not drastic the manager will have a reasonable idea of the parameters of the budget.
At the same time, the percentage-of-sales method has some serious disadvantages,
including the basic premise on which the budget is established: sales. Letting the level
of sales determine the amount of advertising and promotions dollars to be spent
reverses the cause-and-effect relationship between advertising and sales. It treats
advertising as an expense associated with making a sale rather than an investment. As
shown in Figure 7-16, companies that consider promotional expenditures an investment
reap the rewards.
A second problem with this approach was actually cited as an advantage earlier: stability.
Proponents say that if all firms use a similar percentage, that will bring stability
to the marketplace. But what happens if someone varies from this standard percentage?
The problem is that this method does not allow for changes in strategy either internally
or from competitors. An aggressive firm may wish to allocate more monies to the
advertising and promotions budget, a strategy that is not possible with a percentage-ofsales
method unless the manager is willing to deviate from industry standards.
The percentage-of-sales method of budgeting may result in severe misappropriation
of funds. If advertising and promotion have a role to perform in marketing a product,
then allocating more monies to advertising will, as shown in the S-shaped curve, generate
incremental sales (to a point). If products with low sales have smaller promotion
budgets, this will hinder sales progress. At the other extreme, very successful products
may have excess budgets, some of which may be better appropriated elsewhere.
The percentage-of-sales method is also difficult to employ for new product introductions.
If no sales histories are available, there is no basis for establishing the budget.
Projections of future sales may be difficult, particularly if the product is highly
innovative and/or has fluctuating sales patterns.
Finally, if the budget is contingent on sales, decreases in sales will lead to decreases in
budgets when they most need to be increased. Continuing to cut the advertising and promotion
budgets may just add impetus to the downward sales trend. On the other hand,
Marketing investment
Share of market
Investments Pay Off in Later Years
Investment in
year 1 has
an impact on
market share
in years 2, 3,
4, and on.
1 2
1 2
3 4 5
6 7 8 9 10
Year 7 share of
market has been
shaped by marketing
investments in years
3, 4, 5, and 6, as well
as year 7.
3 4 5 6 7 8 9 10
Year
© The McGraw−Hill
Companies, 2003
Figure 7-16 Investments
pay off in later years
221
Chapter Seven Establishing Objectives and Budgeting for the Promotional Program