The percentage-of-sales method is generally a _____

Understand different ways in which promotion budgets can be set.
Understand how the budget can be allocated among different media.

Inhaltsverzeichnis Show

Marketing Methods
Objective and Task Method
Creating a Marketing Budget
Other Factors
Percentage of credit sales method
Percentage of receivables method
How Zendesk’s CRM software can help

An offering’s budget is a critical factor when it comes to deciding which message strategies to pursue. Several methods can be used to determine the promotion budget. The simplest method for determining the promotion budget is often merely using a percentage of last year’s sales or the projected sales for the next year. This method does not take into account any changes in the market or unexpected circumstances. However, many firms use this method because it is simple and straightforward.

The affordable method, or what you think you can afford, is a method used often by small businesses. Unfortunately, things often cost more than anticipated, and you may not have enough money. Many small businesses think they’re going to have money for promotion, but they run out and cannot spend as much on promotion as they had hoped. Such a situation may have happened to you when you planned a weekend trip based on what you thought you could afford, and you did not have enough money. As a result, you had to modify your plans and not do everything you planned.

Other companies may decide to use competitive parity—that is, they try to keep their promotional spending comparable to the competitors’ spending level. This method is designed to keep a brand in the minds of consumers. During a recession, some firms feel like they must spend as much—if not more—than their competitors to get customers to buy from them. Other companies are forced to cut back on their spending or pursue more targeted promotions. When Kmart faced bankruptcy, they cut back on expenditures, yet they kept their advertising inserts (free-standing inserts, or FSI) in Sunday newspapers to remain competitive with other businesses that had an FSI.

A more rational and ideal approach is the objective and task method, whereby marketing managers first determine what they want to accomplish (objectives) with their communication. Then they determine what activities—commercials, sales promotions, and so on—are necessary to accomplish the objectives. Finally, they conduct research to figure out how much the activities, or tasks, cost in order to develop a budget.

Part of the budgeting process includes deciding how much money to allocate to different media. Although most media budgets are still spent predominantly on traditional media, shifts in spending are occurring as the media landscape continues to change. Mobile marketing continues to become more popular as a way to reach specific audiences. Over one-third of cell phone users were exposed to mobile advertising in 2009 and 16 percent of the people exposed to mobile advertising responded to the ads via text messaging. Younger people are typically the most accepting of mobile advertising (Loechner, 2009). Spending on mobile ads is expected to grow 80% from $1.45 billion in 2011 to $2.61 billion in 2012. A big part of the growth is due to the mobile search business of Google (Cotton, 2012).

The manufacturers of most major brands use texting and multimedia messages. Mobile marketing allows advertisers to communicate with consumers and businesses on the go. Over half of Chinese, Korean, Indian, and Thai Internet users access social media sites through their phones rather than through computers1. While many marketers plan to use electronic devices for their mobile-marketing strategies, other firms may use movable or mobile promotions (see Figure 11.11 “Stubb’s Bar-B-Q Trailer—Out-of-Home Advertising That Is Mobile Marketing”), which, as discussed earlier, are also considered out-of-home advertising.

Companies can determine how much to spend on promotion several different ways. The percent of sales method, in which companies use a set percentage of sales for their promotion, is often the easiest method to use. Small companies may focus on what they think they can afford while other organizations may try to keep their promotions relatively equal to their competitors’. The objective and task approach takes objectives into consideration and the costs of the tasks necessary to accomplish objectives in order to determine the promotion budget.

1“Social Network Site Users Ready to Go Mobile But Telecom Carriers Need to Set the Stage for Mass Adoption, Says IDC,” IDC, November 17, 2009, http://www.idc.com/AP/pressrelease.jsp?containerId=prSG22084309 (accessed January 20, 2010).

References

Cotton, D., “Mobile-Ad Spending Projected to Reach $2.61B in 2012,” Ad Age Digital, January 26, 2012, http://adage.com/article/digital/mobile-ad-spending-projected-reach-2-61b-2012/232334/

Loechner. J., “Advertising Growth Spreads in All Mobile Formats,” Research Brief, MediaPost Blogs, May 27, 2009, http://www.mediapost.com/publications/article/106675/advertising-growth-spreads-in-all-mobile-formats.html (accessed March 12, 2012).

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A company's advertising budget generally depends on the company´s marketing goals and objectives. A business can use any of several allocation methods to create its marketing budget. The objective and task method is a method of allocating funds to advertising. Using this method requires the advertising budget to reflect the desired result and the promotional tasks.

Marketing Methods

Four common strategies of budgeting for promotional expenditure include the percentage of sales method, affordable method, competitive parity method and objective and task method. The percentage of sales method is used by companies that prepare sales forecasts to set budgets. This method allocates marketing expenditures based on past or anticipated sales. The affordable method, on the other hand, allows a company to invest what it can afford toward advertising. Companies that use the competitive parity method attempt to match advertising spending to competitors’ budgets.

Objective and Task Method

Businesses that use the objective and task method for determining advertising expenses allocate the marketing budget based on set objectives. To use this method, a company must define the desired results of advertising and the strategies and tactics required to achieve these results. Additionally, the business must assess the costs associated with these strategies and tactics. If no financial restrictions exist, a company can build its marketing budget by examining each goal or objective and the tasks necessary to reach these objectives. A primary challenge associated with this method is the difficulty of accurately assessing the advertising costs necessary to accomplish the goals.

Creating a Marketing Budget

To develop a marketing budget using the objective and task method, a company must determine its marketing objectives and the tasks required to perform those objectives. To calculate the promotional expenditures, the business must evaluate the costs of each task. Additionally, when using this method, businesses should monitor competitors’ activities and compare internal results against industry averages. Further, businesses must specify when to make advertising expenditures while maintaining an element of flexibility. Finally, the objective and task method requires the business to monitor the actual results against forecasts.

Other Factors

Before deciding on an advertising campaign, a company should always assess current market conditions. The factors a firm should consider when creating a marketing budget include the nature of the market, the profile of target customers and the position of the company´s products or services in the market. The company also must evaluate how much profit it can expect to earn for each dollar spent on promotion. A company can also choose to combine several marketing methods to achieve the best possible results from marketing efforts.

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The percentage of sales method, while useful, doesn’t cover every financial aspect of a business. Because of this, there are two additional methods we want to look at when calculating financial health: the percentage of credit sales method and the percentage of receivables method.

Percentage of credit sales method

Credit sales carry a great deal of risk despite their convenience, including processing fees. One of the largest risks is bad credit expense. Bad credit expense refers to purchases that go uncollected due to credit card complications on the customer end.

Larger companies allow for a certain percentage of bad credit in their financial analysis, but many small businesses don’t, and it can lead to unrealistic projections and unforeseen loss.

To calculate your potential bad debts expense (BDE), simply multiply your total credit sales by the percentage you anticipate losing.

Let’s look at Liz again.

With a revenue of $60,000, she’s not running a corporation, but she should still expect to run into a small amount of bad debt expense. By looking over her records, she finds that for the month, her credit purchases come to $55,000 (with $5,000 cash).

She estimates that approximately 2 percent of her credit sales may come back faulty.

Therefore, her BDE formula looks like this:

BDE = 2% x $55,000

This leads to a total BDE of $1,100.

This number may seem small, but it’s crucial when you remember that she’s hoping for an increase of sales next month of $1,978. With a BDE of $1,100, she might be looking at merely an extra $878, which significantly impacts any new purchases she might be looking to make.

Percentage of receivables method

The percentage of receivables method is similar to the percentage of credit sales method, except that it looks at percentages over smaller time frames rather than a flat rate of BDE.

This method is widely considered more effective and referred to as ‘accounts receivable aging.’

For this method, rather than taking the percentage of potential BDE from the entire period (let’s stick with a month, for ease), the percentage of receivables method breaks down the percentages into smaller time frames within a period and only focuses on the amounts unpaid from that period.

For a month, this might look like this:

This method is seen as more reliable because it breaks down the probability of BDE by the length of time past-due. There is a lower chance that recent purchases won’t be settled by the credit card companies than purchases over a month out. This allows for a more precise understanding of what money may be lost.

How Zendesk’s CRM software can help

When performing any financial calculations, accurate data is your number-one priority. With Zendesk Sell, keeping track of your customers and your transactions is easy. Our CRM platform is user-friendly, compatible with existing software, and workable with hundreds of additional software companies.

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