Business / Marketing Minor

Marketing FundamentalsM21439

Session 7:

Devising & Justifying Budgets

Key Concepts

• Costs and budgets

• Profit & Loss Account

• Methods of devising budgets

• Forecasting sales

• Dimensions of a market analysis

Why Do You Need To Devise A Budget?

Bayne (1997) states that

“Management likes to know where it has spent

its money … and there is never enough

money to do everything you would like to do

when it comes to marketing.”

Devising & Justifying Budgets

A detailed marketing plan allows marketers to

plan and budget for marketing activities in a

logical and detailed manner.

The structure of the plan allows all personnel to

understand the detail of the proposed

campaign and its relationship to the

organisations mission and objectives.

Costs & Budgets

If the cost of implementing the strategies and

carrying out the action plans is greater than

the contribution to company profits resulting

from the additional sales forecast in the plan

– you might as well forget the plan now!

Top & Bottom of Budget Setting

TOP-DOWNDetermined by senior

executive

BOTTOM-UPDetermined by functional

specialists

Source: Pickton,D. & Broderick,A. (2001) Integrated Marketing Communications UK:Prentice Hall, p.442

Revenue

Price is the only element of the marketing mix

which gives the organisation revenue.

All the other elements are a cost to the

organisation.

Profit & Loss Account£000

Turnover (PRICE) 6,000

LESS Cost of Sales (PRODUCT) 4,000

GROSS PROFIT 2,000

Other Costs 100

LESS Operating Expenses 850

950

OPERATING PROFIT 1,050

Examples of ‘Other Costs & Operating Expenses’

• PROMOTION:

- Advertising- PR- Sponsorship- Exhibitions

• PLACE:

- Agents Fees- Distribution costs

• PEOPLE:

- Salaries- Recruitment

• PROCESS:

- Administration costs- Data processing costs

• PHYSICAL PRESENCE:

- Literature- Car costs- Travel

Costs – Changing Categories

Costs may change marketing mix category

depending upon the organisation.

Methods of Devising Budgets1. Based on Last Year’s Marketing Budget

2. Based on a Percentage of Company Sales

3. Based on a Percentage of the Total Marketing Budget

4. Based on a Reallocation of Marketing Funds

5. Based on What Other Companies in the Industry are Spending

6. Based on Creating an Effective Presence

7. Based on a Graduated Plan Tiered into Measurable Results

8. Based on a Combination of Several Factors

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Based on Last Year’s Marketing Budget

If already has a presence in the market:

- evaluate what worked and didn’t last year

- consider what costs have changed since the previous year

- review this year’s objectives

- make appropriate adjustments

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Based on a Percentage of Company Sales

- Based on a percentage of the forecasted sales for the year/quarter/month.

- Based on actual sales (could be considered as the tail wagging the dog).

- The exact percentage may change from industry/organisation. Further research is needed.

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Based on a Percentage of the Total Marketing Budget

- Assumes that the marketing for each product is not complementary or equal in the marketing mix.

- May depend how much the company relies on the product.

- Some products may need to be supported more than others.

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Based on a Reallocation of Marketing Funds

- Assumes that some activities may be decreased or eliminated while others take up the slack.

- If a product fails to meet its projections then funds may be removed at short notice.

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Based on What Other Companies in the Industry Are Spending

- Certain organisations can provide advertising spend by industry and company.

- Depends upon what industry the organisation considers itself to be in.

- Depends on the organisation’s strategy in that specific market e.g. market leader or follower.

- Depends on the purpose of marketing to the organisation e.g. PR or sales only.

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Based on Creating an Effective Presence

- Looks at the actual activities needed to create a marketing presence and allocates funds accordingly.

- One of the least often used methods, especially by those companies that need it the most.

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Based on a Graduated Plan Tiered into Measurable Results

- Assumes that the product will be continued and will grow from year to year.

- Assumes also that there will be a continued demonstration of either a return on investment or some type of positive effect.

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Based on a Combination of Several Factors

- Marketing success is so intangible that one cannot rely on just one approach to budgeting.

- Best approach may include a combination of all the previously mentioned methods.

- If preparing a budget for a new product is may be worth preparing three budgets – a low one, medium one and high one – in terms of total spend.

Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

Budgeting

Budgeting methods need to be developed to

produce a realistic figure for the marketer to

work with in order to achieve objectives.

The main budget setting methods:

- Judgmental

- Data based

Judgmental Budget

1. Arbitrary Budgets

2. Affordable method

3. Percentage of past sales method

4. Percentage of future sales method

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593-594

Judgmental Budget - Arbitary

Based on what has always been spent in the

past or, for a new product, on what is usually

spent on that kind of thing.

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593

Judgmental Budget - Affordable

Closely linked to arbitrary budgets and

imposes a limit based either on what is left

over after other more important expenses

have been met or on what the company feels

to be the maximum allowable.

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593

Judgmental Budget - % of Past Sales

Marketing budget based entirely on past

sales performance. Budget is a percentage

of sales and the percentage may differ from

organisation to organisation.

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593

Judgmental Budget - % of Future Sales

Marketing budget based entirely on future

sales performance. Budget is a percentage of

future sales and the percentage may differ

from organisation to organisation.

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593

Data-Based Budget Setting

1. Competitive parity

2. Objective and task budgeting

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593-594

Data-Based Budget Setting – Competitive Parity

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593-594

Involves discovering what the competition is

spending and then matching or exceeding it.

Data-Based Budget Setting – Objective & Task

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593-594

Objectives are defined and then costs are

defined based on what needs to be done to

achieve those objectives.

Composite Budgeting

Many organisations use a combination of

budgeting techniques to devise and justify

their proposed spend.

Forecasting Sales

Companies commonly use a three stage

procedure to arrive at a sales forecast:

1. Environmental forecast

2. Demand forecast

3. Company sales forecast

Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.266

Forecasting – What?

There are four main heading under which sales

forecasting techniques can be placed:

1. What is there – total market demand.

2. What people think – what customers or potential customers/stakeholders think.

3. What happened when – new product forecasting methods.

4. What happened – use of pattern of past sales, or other items, to estimate the future.

Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

What Is There

1. Market build up – identifies all the potential buyers in each market and estimates their potential purchases.

2. Chain ratios – multiplies a base number by a chain of adjusting percentages.

3. Market-factor index – estimates the market potential for consumer goods.

Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

What People Think

Subjective methods including:

- Buyers’ intentions

- Salesforce opinion

- Experts’ opinion

Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

What Happened When

Two types:

1. Integrative – Cross impact analysis, scenario writing

2. Experimentation- Concept testing, test marketing

Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

What Happened

Three types:

1. Sales – time series, curve fit

2. Technology – S-curve diffusion, technology substitution, trend analysis

3. Causal – statistical demand analysis, multivariate sales forecasting

Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

Dimensions of a Market Analysis

• Actual and potential market size

• Market growth

• Market profitability

• Cost structure

• Distribution systems

• Trends and developments

• Key success factors

Source: Aaker,D.A. (1998) Strategic Market Management 5th ed, USA:Wiley, p.79

Developing Campaigns

The marketer has to develop campaigns with

(often) tight budgets, or fight for a larger

share of available resources.

It is important to develop a budgeting method

that produces a realistic figure for the

marketer to work with in order to achieve

objectives.

Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593