Setting the Promotion BudgetFrom Figure 17-7, it is clear that the promotion expenditures needed to reach U.S. households are enormous. Note that each of the companies spends a total of more than $2 billion annually on promotion.24
After setting the promotion objectives, a company must decide how much to spend. Determining the ideal amount for the budget is difficult because there is no precise way to measure the exact results of spending promotion dollars. However, several methods can be used to set the promotion budget.Percentage of SalesIn the percentage of sales budgetingapproach, funds are allocated to promotion as a percentage of past or anticipated sales, in terms of either dollars or units sold. A common budgeting method, this approach is often stated in terms such as, “Our promotion budget for this year is 3 percent of last year's gross sales.”26The advantage of this approach is obvious: It is simple and provides a financial safeguard by tying the promotion budget to sales. However, there is a major fallacy in this approach, which implies that sales cause promotion. Using this method, a company may reduce its promotion budget because of a downturn in past sales or an anticipated downturn in future sales—situations in which it may need promotion the most. See the Applying Marketing Metrics box for an application of the promotion-to-sales ratio to the soft-drink industry.27Competitive ParityA second common approach, competitive parity budgeting, is matching the competitor's absolute level of spending or the proportion per point of market share. This approach has also been referred to as matching competitorsor share of market. It is important to consider the competition in budgeting. Consumer responses to promotion are affected by competing promotional activities, so if a competitor runs 30 radio ads each week, it may be difficult for a firm to get its message across with only 5 ads. The competitor's budget level, however,should not be the only determinant in setting a company's budget. The competition might have very different promotional objectives, which require a different level of promotion expenditures.ApplyingMarketing MetricsHow Much Should You Spend on IMC?Integrated marketing communications (IMC) programs coordinate a variety of promotion alternatives to provide a consistent message across audiences. The amount spent on the various promotional elements, or on the total campaign, may vary depending on the target audience, the type of product, where the product is in the product life cycle, and the channel strategy selected. Managers often use the promotion-to-sales ratio on their marketing dashboard to assess how effective the IMC program expenditures are at generating sales.