October 2004: Volume 46, Number 10
Determining The Marketing Budget
by Michael Pasqua
Ask the right question
One of the most difficult jobs you face each year is budgeting. It’s a function that requires you to predict what you’ll need, what it will cost and what will be the rewards. Many budget items are obvious: real estate taxes, for example, or the monthly payment due on your trucks. Marketing budgets are not as cut and dried. Whether your company already has such a budget, or this is the first time you’re considering one, the most frequently asked question about promotional budgeting is “how much?” when the real question should be, “What are the various methods for setting promotional budgets?”
Two methods to not try
The first is the most often used and the most flawed. It is called the “percent of sales” method--if you sell more product, you’ll invest more in promotion. This is literally putting the cart before the horse. Those who decide on this method can be easily spotted at industry gatherings--they claim advertising and public relations and promotions are a waste of time and money!
More sensible, but just as limiting is the “percent of profit” method. Under this method, promotion seems to be tied to its return on investment, but again, it puts the horse in the wrong place. Your promotional efforts have to begin at the front of the process.
Competition based alternatives
Another budgeting option is “matching the competition.” Here, one estimates what others in the industry are investing and then matches that figure. The problem with this method is that it keeps you evenly paced with your competition and prevents you from gaining on them.
The fourth method is a combination of the first and third. Known as the “keep pace” method, it calls for you to invest an amount proportionately equal to your competition’s sales-to-promotion ratio. Thus, if your competitor invests five percent of sales on promotion, you would do the same.
The right choice
The fifth, and most sophisticated means of discovering the right promotional budget is called the “task oriented” method. As implied, the object is to achieve a task or goal. It’s the preferable technique for most businesses because the budget can be easily determined, enacted and monitored.
When we apply this method to our clients’ programs, we start with a list of all the promotional tactics that would advance our communications strategy, citing the task it is intended to achieve. Some call this a wish list; we think of it as a promotional menu.
We then prioritize the items on the list and assign actual costs to each. Once this is done we meet with our clients and determine what is really essential, what can be pared down, what can be postponed and what can be eliminated. Now we are ready to formulate the budget based on what the company can really afford to invest.
The benefit of this method is that it lets promotion be the driving force for your overall marketing program rather than the necessary expense--or unnecessary evil--as some may view it. If your marketing budget dollars are working for you from the outset, those dollars generate more sales activity, more community exposure, more business. And isn’t that the point?
About the author
Michael Pasqua is a partner at Hercky Pasqua Herman, an award winning full service advertising, marketing and public relations agency specializing in business-to-business clients. The firm offers a full range of services to clients in every budget category across a broad span of industries. He can be reached at Hercky Pasqua Herman, 324 Chestnut Street, Roselle Park NJ 07204, telephone (908)241-9474, email michael_ pasqua@ hotmail.com