Firms expend considerable amount on promotional activities. Four methods are employed in determining the budget for promotional expenditure. They are detailed as follows.
1. Affordable method
Many companies employ the affordable method for determining the promotion budget. The promotion budget is set in a manner which the company can afford. This method is a subjective assessment, as it pays little attention to the long-term promotional needs of a service. This method does not consider the role of promotion in sales volume. Employment of affordable method very often results in an uncertain annual budget, making the long-range planning difficult.
2. Percentage of sales method
Under this method, promotion expenditure is determined as a percentage of sales. The advantages of percentage of sales method are —
First, expenditure on advertising is closely related to the sales. So, the company can easily afford to spend a specified percentage of sale on promotion.
Second, this method facilitates an analysis of the relationship among promotion cost and selling price per unit. Third, this method ensures stability when competitors are also spending the same percentage of sales on promotion.
3. Competitive-parity method
Under this method, advertising expenditure of the firm is equal to the amount spent by competitors. This method follows the policy of the competitors in respect of promotion budget. It is based on the assumption that competitor’s expenditure represents the prudence of the industry.
Since the promotion budget of one firm is in parity with the competitor, promotion war is avoided. However, this method has certain limitations. There is no assurance that competitors’ promotion budget represents collective wisdom of the industry. Companies vary in reputation, resources, objectives and opportunities. So, the promotion budget appropriate to one firm may not be appropriate to the other.
4. Objective and task method
Under this method, marketers determine promotion budget by defining specific objectives, determining tasks to be performed to accomplish the objectives and estimating the cost of performing these tasks. This method is rational as it sets the promotion budget at a cost which is required to realize the objective of the company.