Four common methods are used to set a promotion budget:-
Affordable method:- Many companies set the promotion budget at what they think the company.
Percentage of sales method:- Many companies set their promotion expenditure at a specified percentage of sales or of the sales price .
Competitive party method:- Some companies set their advertising budget to achieve share of voice party with their competitors. The marketing manager believes that by spending the same percentage of his sales on advertising as his competitor, he will maintain his market share.
Objective and task method:- The objective and task method calls upon marketers to develop their promotion budgets by defining their specific objectives, determining the objectives and estimating the costs of performing these tasks. The sum of these costs is the proposed promotion budget.
Some specific factors that are considered when setting the advertising budget are:-
Stage in the product life cycle:- New product typically receive large advertising budgets to build awareness and to gain consumer trail. Established brands usually are supported with lower budgets as a ratio to sales.
Market share and consumer base:– High market share brands usually require less advertising expenditure as a percentage of sales to maintain their share. To build share by increasing market size or market share requires larger advertising expenditure.
Competition and cluster:– In a market with a large number of competitors and high advertising spending a brand must advertise more heavily to be heard above the noise in the market.
Advertising frequency:– The number of repetitions needed to put across the brand’s message to consumers also determine the advertising budget.
Product substitutability:– Brands in a commodity class require heavy advertising to establish differential image.