Age Of Sales Method

Belch: Advertising and IV. Objectives and 7. Establishing Objectives © The McGraw-Hill

Promotion, Sixth Edition Budgeting for Integrated and Budgeting for the Companies, 2003

Marketing Promotional Program Communications Programs 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 percent-age-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-of-sales 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,

Investments Pay Off in Later Years

Investment in year 1 has an impact on market share in years 2, 3, 4, and on.

Figure 7-16 Investments pay off in later years

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.

Figure 7-16 Investments pay off in later years

Belch: Advertising and IV. Objectives and 7. Establishing Objectives © The McGraw-Hill

Promotion, Sixth Edition Budgeting for Integrated and Budgeting for the Companies, 2003

Marketing Promotional Program Communications Programs

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