Setting the Total Promotion Budget and Mix

We have looked at the steps in planning and sending communications to a target audience. But how does the company decide on the total promotion budget and its division among the major promotional tools to create the promotion mix? By what process does it blend the tools to create integrated marketing communications? We now look at these questions.

One of the hardest marketing decisions facing a company is how much to spend on promotion. John Wanamaker, the department store magnate, once said, "I know that half of my advertising is wasted, but I don't know which half. I spent $2 million for advertising, and I don't know if that is half enough or twice too much." Thus, it is not surprising that industries and companies vary widely in how much they spend on promotion. Promotion spending may be 20 to 30 percent of sales in the cosmetics industry and only 2 or 3 percent in the industrial machinery industry. Within a given industry, both low and high spenders can be found.¹²

How does a company decide on its promotion budget? We look at four common methods used to set the total budget for advertising: the affordable method, the percentage-of-sales method, the competitive-parity method, and the objective-and-task method.¹³

Some companies use the affordable method: They set the promotion budget at the level they think the company can afford. Small businesses often use this method, reasoning that the company cannot spend more on advertising than it has. They start with total revenues, deduct operating expenses and capital outlays, and then devote some portion of the remaining funds to advertising.

Unfortunately, this method of setting budgets completely ignores the effects of promotion on sales. It tends to place advertising last among spending priorities, even in situations in which advertising is critical to the firm's success. It leads to an uncertain annual promotion budget, which makes long-range market planning difficult. Although the affordable method can result in overspending on advertising, it more often results in underspending.

Other companies use the percentage-of-sales method, setting their promotion budget at a certain percentage of current or forecasted sales. Or they budget a percentage of the unit sales price. The percentage-of-sales method has advantages. It is simple to use and helps management think about the relationships between promotion spending, selling price, and profit per unit.

Despite these claimed advantages, however, the percentage-of-sales method has little to justify it. It wrongly views sales as the cause of promotion rather than as the result. "A study in this area found good correlation between investments in advertising and the strength of the brands concerned—but it turned out to be effect and cause, not cause and effect.… The strongest brands had the highest sales and could afford the biggest investments in advertising!"¹⁴ Thus, the percentage-of-sales budget is based on availability of funds rather than on opportunities. It may prevent the increased spending sometimes needed to turn around falling sales. Because the budget varies with year-to-year sales, long-range planning is difficult. Finally, the method does not provide any basis for choosing a specific percentage, except what has been done in the past or what competitors are doing.

Still other companies use the competitive-parity method, setting their promotion budgets to match competitors' outlays. They monitor competitors' advertising or get industry promotion spending estimates from publications or trade associations, and then set their budgets based on the industry average.

Two arguments support this method. First, competitors' budgets represent the collective wisdom of the industry. Second, spending what competitors spend helps prevent promotion wars. Unfortunately, neither argument is valid. There are no grounds for believing that the competition has a better idea of what a company should be spending on promotion than does the company itself. Companies differ greatly, and each has its own special promotion needs. Finally, there is no evidence that budgets based on competitive parity prevent promotion wars.

The most logical budget-setting method is the objective-and-task method, whereby the company sets its promotion budget based on what it wants to accomplish with promotion. This budgeting method entails (1) defining specific promotion objectives, (2) determining the tasks needed to achieve these objectives, and (3) estimating the costs of performing these tasks. The sum of these costs is the proposed promotion budget.

The objective-and-task method forces management to spell out its assumptions about the relationship between dollars spent and promotion results. But it is also the most difficult method to use. Often, it is hard to figure out which specific tasks will achieve specific objectives. For example, suppose Sony wants 95 percent awareness for its latest camcorder model during the six-month introductory period. What specific advertising messages and media schedules should Sony use to attain this objective? How much would these messages and media schedules cost? Sony management must consider such questions, even though they are hard to answer.

The concept of integrated marketing communications suggests that the company must blend the promotion tools carefully into a coordinated promotion mix. But how does the company determine what mix of promotion tools it will use? Companies within the same industry differ greatly in the design of their promotion mixes. For example, Avon spends most of its promotion funds on personal selling and direct marketing, whereas Revlon spends heavily on consumer advertising. Hewlett-Packard relies on advertising and promotion to retailers when marketing personal computers, whereas Dell Computer uses only direct marketing. We now look at factors that influence the marketer's choice of promotion tools.

Each promotion tool has unique characteristics and costs. Marketers must understand these characteristics in selecting their mix of tools.

ADVERTISING    Advertising can reach masses of geographically dispersed buyers at a low cost per exposure, and it enables the seller to repeat a message many times. For example, television advertising can reach huge audiences. An estimated 120 million to 130 million Americans tuned in to at least part of the most recent Super Bowl, more than 72 million people watched at least part of the last Academy Awards broadcast, and nearly 52 million watched the final episode of the first Survivor series. "If you want to get to the mass audience," says a media services executive, "broadcast TV is where you have to be." He adds, "For anybody introducing anything who has to lasso audience in a hurry—a new product, a new campaign, a new movie—the networks are still the biggest show in town."¹⁵

Beyond its reach, large-scale advertising says something positive about the seller's size, popularity, and success. Because of advertising's public nature, consumers tend to view advertised products as more legitimate. Advertising is also very expressive—it allows the company to dramatize its products through the artful use of visuals, print, sound, and color. On the one hand, advertising can be used to build up a long-term image for a product (such as Coca-Cola ads). On the other hand, advertising can trigger quick sales (as when Sears advertises a weekend sale).

Advertising also has some shortcomings. Although it reaches many people quickly, advertising is impersonal and cannot be as directly persuasive as can company salespeople. For the most part, advertising can carry on only a one-way communication with the audience, and the audience does not feel that it has to pay attention or respond. In addition, advertising can be very costly. Although some advertising forms, such as newspaper and radio advertising, can be done on smaller budgets, other forms, such as network TV advertising, require very large budgets.

PERSONAL SELLING    Personal selling is the most effective tool at certain stages of the buying process, particularly in building up buyers' preferences, convictions, and actions. It involves personal interaction between two or more people, so each person can observe the other's needs and characteristics and make quick adjustments. Personal selling also allows all kinds of relationships to spring up, ranging from a matter-of-fact selling relationship to personal friendship. The effective salesperson keeps the customer's interests at heart in order to build a long-term relationship. Finally, with personal selling, the buyer usually feels a greater need to listen and respond, even if the response is a polite "No thank you."

These unique qualities come at a cost, however. A sales force requires a longer-term commitment than does advertising—advertising can be turned on and off, but sales force size is harder to change. Personal selling is also the company's most expensive promotion tool, costing companies $170 on average per sales call.¹⁶ U.S. firms spend up to three times as much on personal selling as they do on advertising.

SALES PROMOTION    Sales promotion includes a wide assortment of tools—coupons, contests, cents-off deals, premiums, and others—all of which have many unique qualities. They attract consumer attention, offer strong incentives to purchase, and can be used to dramatize product offers and to boost sagging sales. Sales promotions invite and reward quick response—whereas advertising says, "Buy our product," sales promotion says, "Buy it now." Sales promotion effects are often short-lived, however, and often are not as effective as advertising or personal selling in building long-run brand preference.

PUBLIC RELATIONS    Public relations is very believable—news stories, features, sponsorships, and events seem more real and believable to readers than ads do. Public relations can also reach many prospects who avoid salespeople and advertisements—the message gets to the buyers as "news" rather than as a sales-directed communication. And, as with advertising, public relations can dramatize a company or product. Marketers tend to underuse public relations or to use it as an afterthought. Yet a well-thought-out public relations campaign used with other promotion mix elements can be very effective and economical.

DIRECT MARKETING    Although there are many forms of direct marketing—telephone marketing, direct mail, online marketing, and others—they all share four distinctive characteristics. Direct marketing is nonpublic: The message is normally directed to a specific person. Direct marketing is immediate and customized: Messages can be prepared very quickly and can be tailored to appeal to specific consumers. Finally, direct marketing is interactive: It allows a dialogue between the marketing team and the consumer, and messages can be altered depending on the consumer's response. Thus, direct marketing is well suited to highly targeted marketing efforts and to building one-to-one customer relationships.

Marketers can choose from two basic promotion mix strategies—push promotion or pull promotion. Figure 15.4 contrasts the two strategies. The relative emphasis on the specific promotion tools differs for push and pull strategies. A push strategy involves "pushing" the product through distribution channels to final consumers. The producer directs its marketing activities (primarily personal selling and trade promotion) toward channel members to induce them to carry the product and to promote it to final consumers. Using a pull strategy, the producer directs its marketing activities (primarily advertising and consumer promotion) toward final consumers to induce them to buy the product. If the pull strategy is effective, consumers will then demand the product from channel members, who will in turn demand it from producers. Thus, under a pull strategy, consumer demand "pulls" the product through the channels.

Some industrial goods companies use only push strategies; some direct-marketing companies use only pull. However, most large companies use some combination of both. For example, Kraft uses mass-media advertising and consumer promotions to pull its products and a large sales force and trade promotions to push its products through the channels. In recent years, consumer goods companies have been decreasing the pull portions of their mixes in favor of more push. This has caused concern that they may be driving short-run sales at the expense of long-term brand equity.

Companies consider many factors when designing their promotion mix strategies, including type of product/market and the product life-cycle stage. For example, the importance of different promotion tools varies between consumer and business markets. B2C companies usually "pull" more, putting more of their funds into advertising, followed by sales promotion, personal selling, and then public relations. In contrast, B2B marketers tend to "push" more, putting more of their funds into personal selling, followed by sales promotion, advertising, and public relations. In general, personal selling is used more heavily with expensive and risky goods and in markets with fewer and larger sellers.

The effects of different promotion tools also vary with stages of the product life cycle. In the introduction stage, advertising and public relations are good for producing high awareness, and sales promotion is useful in promoting early trial. Personal selling must be used to get the trade to carry the product. In the growth stage, advertising and public relations continue to be powerful influences, whereas sales promotion can be reduced because fewer incentives are needed. In the mature stage, sales promotion again becomes important relative to advertising. Buyers know the brands, and advertising is needed only to remind them of the product. In the decline stage, advertising is kept at a reminder level, public relations is dropped, and salespeople give the product only a little attention. Sales promotion, however, might continue strong.

Having set the promotion budget and mix, the company must now take steps to see that all of the promotion mix elements are smoothly integrated. Here is a checklist for integrating the firm's marketing communications.¹⁷

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Analyze trends—internal and external—that can affect your company's ability to do business. Look for areas where communications can help the most. Determine the strengths and weaknesses of each communications function. Develop a combination of promotional tactics based on these strengths and weaknesses.

•	Audit the pockets of communications spending throughout the organization. Itemize the communications budgets and tasks and consolidate these into a single budgeting process. Reassess all communications expenditures by product, promotional tool, stage of the life cycle, and observed effect.

•	Identify all contact points for the company and its brands. Work to ensure that communications at each point are consistent with your overall communications strategy and that your communications efforts are occurring when, where, and how your customers want them.

•	Team up in communications planning. Engage all communications functions in joint planning. Include customers, suppliers, and other stakeholders at every stage of communications planning.

•	Create compatible themes, tones, and quality across all communications media. Make sure each element carries your unique primary messages and selling points. This consistency achieves greater impact and prevents the unnecessary duplication of work across functions.

•	Create performance measures that are shared by all communications elements. Develop systems to evaluate the combined impact of all communications activities.

•	Appoint a director responsible for the company's persuasive communications efforts. This move encourages efficiency by centralizing planning and creating shared performance measures.