Determining Promotional Appropriation
Written by Samuel Muriithi for Gaebler Ventures
In as far as determining promotional appropriations is concerned there are two main difficulties faced by business owners. It is quite difficult to establish the total amount that should be spent on a promotional mix and secondly, the amount that will be allocated to each activity in the said mix. Equally difficult to gauge are the results achieved after funds have been spent on the promotional activity.
Four methods are primarily used in determining the appropriation for promotion. These techniques are mostly relevant for the advertising element of a promotional mix but the same appropriations can be used in determining the appropriation for promotion in total.
1. Relation to sales
In determining the appropriation for promotion in relation to sales one can use a couple of techniques including the unit method and the percentage-of-sales method. The latter technique is the most popular simply because it is simple to compute and due to the fact that the expenses used are seen in relation to the income of sales, the promotional expense is taken to be variable rather than fixed in nature.
This technique does not make much business sense in that there is no logic in saying that promotion is achieved from sales whereas it is common knowledge that sales are achieved from promotion. Even by determining the appropriation for promotion after the forecast of future sales the method still defeats logic. Using this method will also mean making a reduction in promotion expenditure as sales decline. This is illogical because when sales are in decline you need to do more promotion.
2. The objective to be achieved
This is a more sound technique for determining the appropriation for promotion. Basically the management identifies the tasks/objectives that must be met by a given promotional activity and then the costs for these are computed. One particular technique under this approach that is in wide use today is the buildup technique. Here, for example, a business may decide on an objective like penetrating a new target market via a certain promotional mix. To do this the firm may find it necessary to hire new personnel, an extra office etc. All the costs required to actualize the promotional mix are computed and summed up. In this way, determining the appropriation for promotion is done via a buildup of the costs involved.
3. The use of all available funds
This technique for determining the appropriation for promotion is normally embraced by new companies. Such tend to invest all their funds into a long term promotional mix, say 1 to 5 years long, with an aim to make optimal sales. The firm expects to earn good profits from this exercise by the end of the designated period and afterwards approach promotion in a different manner/direction.
4. Following the competition
This is yet another wanting technique in as far as determining the appropriation for promotion is concerned. The weaknesses are evident on two fronts - first, the company being followed may have an equally poor idea of how to compute a promotional budget. Secondly, it is almost always the case for different firms to have variant promotional strategies and goals and such differences will render using a uniform appropriation technique logically useless.
Samuel Muriithi is a business owner in Nairobi, Kenya. He has extensive international business experience in the United States and India.
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