A number of methods of determining promotional expenditure are used in business. These include:
Arbitrary allocation. This is a common method that depends on the business executive’s emotions, personality and affiliations. There is no relevancy between budget and objective.
Percentage of sales. This method allocates a proportion of sales or a fixed amount per unit sold to promotional expenditure. It assumes the past sales trend will continue into the future. It appears financially safe as incoming revenue determines expenditure. However, it does not take into account that promotion changes sales. It is suitable as a starting point for very stable markets.
Return on Investment (ROI). This method sees promotion expenditure as a capital investment (ie brand name as an asset). This is logically appealing to marketing and accounting people, but does not take customer into consideration.
Competitive parity. In this method a firm spends relative to the competition on available industry data. However, this only recognises one element of the environment and it does not include customers in the analysis. Furthermore, competitors are likely to have different objectives/strategies and past data is no judge of future strategy. This method is a useful starting point for very competitive markets.
All you can afford. In this method promotional expenditure is what is left over and depends on available funds. The problem with this approach is that it ignores the customer and the firm’s own strategy.
Objectives and tasks. In this method a firm spells out and priorities the objectives realistically then determines what each will cost. As the objectives represent a firm’s goals in a market place with customers this approach in necessarily market oriented.
The objectives task method is most closely aligned with the Marketing Concept. This method guarantees promotional accountability and leads to quarterly or semi-annual reports for future decisions and modifications. The method requires customer research to specify which tasks are necessary. The main problem is knowing how much to spend to achieve each objective. This is especially difficult for a firm entering a new market. The firm will need to experiment and conduct research, as well as store data on the impact of each promotional expenditure for future decision-making.