Imagine you are a marketing executive tasked with introducing a new product. Your sales force will do the selling, and your team will support them with promotional communications. You know your advertising agency will jump in when you call and you need to control the costs.
There are four methods available to you for budgeting promotional expenditures: the percentage of sales method, affordable method, competitive parity method and objective/task method.
The percentage of sales method allocates marketing expenditures based on past or anticipated sales. Using this method, you will be required to forecast sales to set the budget and limit the tasks you undertake to keep costs in line. The affordable method allows a company to invest what it can afford toward advertising. You can use the P&L to set the budget and limit the tasks you undertake to keep costs inline. The competitive parity method attempts to match spending to competitors’ budgets. If your competitors are large companies and you’re smaller, this option is expensive.
The major weakness in all three of the budget methods above is that they fail to clearly define: “What is IT that you want to have happen?” In other words, how much will “it” cost, depends on what "it" is.
The objective/task method of budgeting starts by defining objectives and allocating promotional expenditures based on what tasks are necessary to meet the objectives. This method is superior to all other budgeting methods because rather than eliminate tasks to control expenditures, it eliminates objectives if the budget is not available. While the objective/task method can be combined with the percentage of sales method or the affordable method to define total dollars available, the cost control variables are reversed and the focus is on planning for success.
The process starts by prioritizing objectives based on a strategy and measuring the results to ensure objectives are achieved according to plan.
Here’s an example wherein a railway equipment company and client of ours used the objective/task method to develop a plan to introduce a better product for stopping trains.
Objective #1 – Install and field test the product on 100 cars. Tasks: Develop adequate promotional materials to launch the product internally and incentivize the sales team to introduce the new product to a select group of customers.
Objective #2 - Quickly penetrate the market for new rail cars. Tasks: With opinion leaders now using the new product, an SMS Rapid Rollout was undertaken with a goal of selling several thousand units.
Objective #3 - Retrofit and upgrade 100,000 older railcars with the new product. increasing brand preference and revenue. Tasks: Ongoing campaign to build awareness of benefits with railcar owners and generate inquiries and sales.
A campaign strategy with clear and achievable objectives is the key to effectively using the objective/task budget method and will help you give direction to your advertising agency so they can help develop a plan. Once objectives are defined, your agency, working closely with product line managers and internal marketing staff, should be encouraged to look at a variety of different actions -- price each task -- and let each task or creative idea compete for dollars using judgement to prioritize the task options as well as develop a budget that is both affordable and adequate to achieve the objectives.
When complete, an objective/task budget will allocate both the money and the time needed for success and answer these questions:
Once this is done, you can answer this question: "What is my investment going to do for my company?"
En route, of course, your advertising agency is or should be an important partner in this process. Using history as a guide, your agency can price Videos, press releases, brochures, surveys, white papers, print or online ads, social initiatives, among many other tactics.
Looking at the formidable challenge of budgeting your next project or even an entire year's worth of activities? Hopefully this has been helpful. And, of course, give a shout if you need some help (and a free consult focused on) defining what it is you want to have happen! Doug@onlinesms.com
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