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TYPES OF BUDGETS
1) Percentage of Sales method
Companies using this form prepare budgets based on a) sales from previous years or b) anticipated sales from next year. Advantage Simplicity Drawbacks When sales go up, so does the budget and vice-versa. The opposite of this is needed. Further, during growth periods, budget may not need to be increased. It doesnt allocate money for special needs or to combat competitive pressure.
TYPES OF BUDGETS
2) Meet the Competition method
Primary goal is to prevent loss of market share. Often used in highly competitive markets where rivalries between competitors is intense. Drawbacks Budget may not be spent efficiently. Matching the competitors spending doesnt guarantee success.
TYPES OF BUDGETS
3) What We Can Afford method
Sets the marketing budget after all of the companys other budgets have been determined. Used mostly by newer and smaller companies with limited finances. Drawbacks management doesnt recognise the benefits of marketing and views marketing expenditures as non-revenue-generating activities.
TYPES OF BUDGETS
4) Objective and Task method
Management lists all objectives intended to be pursued, calculates cost of accomplishing each objective and cumulative sum gives communications budget. Best method. Drawbacks Difficult for large companies, such as Procter & Gamble, to use. With hundreds of products on the market, producing budgets based on objectives of each brand is very time consuming.
TYPES OF BUDGETS
5) Payout Planning
Establishes a ratio of advertising to sales (or market share). This method allocates greater amounts in early years (to build brand awareness and brand equity) and gradually reduces the budget in later years (to maintain target growth). Based on the idea of diminishing returns a company that has reached the maximum threshold point shouldnt continue pouring money into advertising, which will only lead to diminishing returns.
TYPES OF BUDGETS
6) Quantitative models
Computer simulations maybe developed to model the relationship between advertising (or promotional expenditures) with sales and profit. Drawbacks Far from perfect. Dont account for the type of industry and product as the model is created. Limited to larger organisations with strong computer and statistical departments.
BUDGETING EXPENDITURES
Normally, media advertising accounts for 25%, trade promotions receive 50% and consumer promotions 25% of a communications budget. These percentages vary from industry to industry. Consumer product manufacturers spend more on trade promotions directed toward retailers, while service companies tend to spend more on media advertising. Budgets also vary by product types. Marketing allocations for business-to-business firms are not the same as those of consumeroriented firms.
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