Shareholder_Value - Shareholder Value(Capital Creation...

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Shareholder Value (Capital) Creation Marketing Mix Budgeting Several different budgeting methods are often taught in setting a marketing budget. All of them have limitations, some so great as to raise questions about whether the method should ever be used. The most common method is to base the budget on what was spent the previous year (see the following Table). The advantage of basing the budget on what was spent in the past ( historic budgeting ) is that it does not require a lot of justification to senior executives. A dramatic increase or decrease from past spending will require some sort of rational explanation why; particularly a big increase as it is likely to mean that the increased spending will have to be taken from some other company budget. Thus it can become very political. The manager or team that the extra spending is coming from will very likely object, challenge the change and ask for a rational justification which they then attack. So we often see that expensive line items in prior marketing budgets such as national TV advertising, whose effectiveness may be questionable, are also recycled from year to year. This same spending on the same item, discourages new ideas and initiatives such as switching most spending to Internet search advertising, whose effect might be greater and measurable. And what was the rational for last year’s spending? If it was based on the previous year, and that on a previous year and no real explanation can be given for past spending except that it was based on even earlier spending, then there is no rational explanation for the spending, which means that the budgeting procedure is irrational – safe and conservative and accepted, but irrational. This method also defies one of the fundamental principles of marketing: marketing is meant to change customer preferences and to change company thinking, products and processes. If marketing is worth spending on, then it should change the market and company performance. In this case, sticking to the past when the whole purpose of marketing is to change the past, is quite irrational. In very dynamic markets with a lot of new competition or high growth potential, basing spending on past budgets can be downright dangerous. Lastly, what do you do if you have no past, if you are starting up a new business development venture? A budget that is based on percentage of expected sales also defies logic. This is because this method puts the cart before the horse. Marketing spending is meant to increase profitability, through increased dollar sales of more profitable products and services to more profitable customers. If a new product is being launched that is superior to the competition then the more money that is spent on the marketing campaign, the greater will be the sales. The fundamental principle involved is that marketing drives sales, rather than sales drives marketing. Thus, when an entrepreneur or executive asks what percentage of expected sales should be spent on marketing, he or she is again revealing a lack of understanding of what marketing
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This note was uploaded on 04/11/2011 for the course MRKT 3023 taught by Professor Biritella during the Spring '11 term at FIU.

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Shareholder_Value - Shareholder Value(Capital Creation...

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