MARKETING FUNDAMENTALS
Devising & Justifying Budgets
Key Concepts
- Costs and budgets
- Profit & Loss Account
- Methods of devising budgets
- Forecasting sales
- Dimensions of a market analysis
Why Do You Need To Devise A Budget?
Bayne (1997) states that
“Management likes to know where it has spent its money … and there is never enough
money to do everything you would like to do when it comes to marketing.”
Devising & Justifying Budgets
A detailed marketing plan allows marketers to plan and budget for marketing activities in a
logical and detailed manner.
The structure of the plan allows all personnel to understand the detail of the proposed
campaign and its relationship to the organisations mission and objectives.
Costs & Budgets
If the cost of implementing the strategies and carrying out the action plans is greater than
the contribution to company profits resulting from the additional sales forecast in the plan –
you might as well forget the plan now!
Top & Bottom of Budget Setting
TOP-DOWN
Determined by senior
executive
BOTTOM-UP
Determined by functional
specialists
Source: Pickton,D. & Broderick,A. (2001) Integrated Marketing Communications UK:Prentice Hall, p.442
Revenue
Price is the only element of the marketing mix which gives the organisation revenue.
All the other elements are a cost to the organisation.
Profit & Loss Account
£000
LESS
LESS
Turnover (PRICE)
6,000
Cost of Sales (PRODUCT)
4,000
GROSS PROFIT
2,000
Other Costs
100
Operating Expenses
850
950
OPERATING PROFIT
1,050
Costs – Changing Categories
Costs may change marketing mix category depending upon the organisation.
Methods of Devising Budgets
1.
Based on Last Year’s Marketing Budget
2.
Based on a Percentage of Company Sales
3.
Based on a Percentage of the Total Marketing Budget
4.
Based on a Reallocation of Marketing Funds
5.
Based on What Other Companies in the Industry are Spending
6.
Based on Creating an Effective Presence
7.
Based on a Graduated Plan Tiered into Measurable Results
8.
Based on a Combination of Several Factors
Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley
Based on Last Year’s Marketing Budget
If already has a presence in the market:
evaluate what worked and didn’t last year
consider what costs have changed since the previous year
review this year’s objectives
make appropriate adjustments
Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley
-
Based on a Percentage of Company Sales
Based on a percentage of the forecasted sales for the year/quarter/month.
Based on actual sales (could be considered as the tail wagging the dog).
The exact percentage may change from industry/organisation. Further
research is needed.
Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley
-
Based on a Percentage of the Total Marketing Budget
Assumes that the marketing for each product is not complementary or equal
in the marketing mix.
May depend how much the company relies on the product.
Some products may need to be supported more than others.
Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley
-
Based on a Reallocation of Marketing Funds
Assumes that some activities may be decreased or eliminated while others take
up the slack.
If a product fails to meet its projections then funds may be removed at short
notice.
Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley
-
Based on What Other Companies in the Industry Are Spending
Certain organisations can provide advertising spend by industry and
company.
Depends upon what industry the organisation considers itself to be in.
Depends on the organisation’s strategy in that specific market e.g. market
leader or follower.
Depends on the purpose of marketing to the organisation e.g. PR or sales
only.
Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley
-
Based on Creating an Effective Presence
Looks at the actual activities needed to create a marketing presence and
allocates funds accordingly.
One of the least often used methods, especially by those companies that
need it the most.
Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley
-
Based on a Graduated Plan Tiered into Measurable Results
Assumes that the product will be continued and will grow from year to year.
Assumes also that there will be a continued demonstration of either a return
on investment or some type of positive effect.
Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley
-
Based on a Combination of Several Factors
Marketing success is so intangible that one cannot rely on just one approach
to budgeting.
Best approach may include a combination of all the previously mentioned
methods.
If preparing a budget for a new product is may be worth preparing three
budgets – a low one, medium one and high one – in terms of total spend.
Budgeting
Budgeting methods need to be developed to produce a realistic figure for the marketer to
work with in order to achieve objectives.
The main budget setting methods:
- Judgmental
- Data based
Judgmental Budget
1. Arbitrary Budgets
2. Affordable method
3. Percentage of past sales method
4. Percentage of future sales method
Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593-594
Judgmental Budget - Arbitary
Based on what has always been spent in the past or, for a new product, on what is usually
spent on that kind of thing.
Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593
Judgmental Budget - Affordable
Closely linked to arbitrary budgets and imposes a limit based either on what is left over
after other more important expenses have been met or on what the company feels to be
the maximum allowable.
Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593
Judgmental Budget - % of Past Sales
Marketing budget based entirely on past sales performance. Budget is a percentage of
sales and the percentage may differ from organisation to organisation.
Judgmental Budget - % of Future Sales
Marketing budget based entirely on future sales performance. Budget is a percentage
of future sales and the percentage may differ from organisation to organisation.
Data-Based Budget Setting
1. Competitive parity
2. Objective and task budgeting
Data-Based Budget Setting – Competitive Parity
Involves discovering what the competition is spending and then matching or exceeding
it.
Data-Based Budget Setting – Objective & Task
Objectives are defined and then costs are defined based on what needs to be done to
achieve those objectives.
Composite Budgeting
Many organisations use a combination of budgeting techniques to devise and justify
their proposed spend.
Forecasting Sales
Companies commonly use a three stage procedure to arrive at a sales forecast:
1.
Environmental forecast
2.
Demand forecast
3.
Company sales forecast
Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.266
Forecasting – What?
There are four main heading under which sales forecasting techniques can be placed:
1.
What is there – total market demand.
2.
What people think – what customers or potential
customers/stakeholders think.
3.
What happened when – new product forecasting methods.
4.
What happened – use of pattern of past sales, or other items,
to estimate the future.
What Is There
1. Market build up – identifies all the potential buyers in each market and estimates
their potential purchases.
2. Chain ratios – multiplies a base number by a chain of adjusting percentages.
3. Market-factor index – estimates the market potential for consumer goods.
What People Think
Subjective methods including:
- Buyers’ intentions
- Salesforce opinion
- Experts’ opinion
1.
2.
What Happened When
Two types:
Integrative – cross impact analysis, scenario writing
Experimentation - concept testing, test marketing
What Happened
Three types:
1. Sales – time series, curve fit
2. Technology – S-curve diffusion, technology substitution, trend Analysis
3. Causal – statistical demand analysis, multivariate sales forecasting
Dimensions of a Market Analysis
- Actual and potential market size
- Market growth
- Market profitability
- Cost structure
- Distribution systems
- Trends and developments
- Key success factors
Source: Aaker,D.A. (1998) Strategic Market Management 5th ed, USA:Wiley, p.79
Developing Campaigns
The marketer has to develop campaigns with (often) tight budgets, or fight for a larger
share of available resources.
It is important to develop a budgeting method that produces a realistic figure for the
marketer to work with in order to achieve objectives.
Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593