Calculation and Application of Marketing Budget

A marketing budget is a quantifiable target which is set by a firm and which relates to its marketing activities. It may involve a target level of sales for a particular product (a sales budget) or set out the amount a firm intends to spend to achieve its marketing objectives (an expenditure budget). The sales budgets may include targets for the absolute level of sales a firm would like to achieve, or for a desired level of market share; they may also include targets for particular regions or for particular types of customers or distribution channels.

Marketing expenditure budgets, by comparison, set out the desired amount of spending on activities such as advertising, sales promotions, paying the sales force, direct mailings and market research.

The size of the sales budgets is likely to depend on:* The level of sales a product has achieved in the past; a firm may extrapolate a future sales target based on past trends* The expenditure budget; a firm may set a higher sales target if it is also intending to spend more on its marketing activities* Market conditions; actions by competitors and the state of the economy, may affect the firm’s expected level of sales* Objectives and strategy; the target level of sales for a niche product is obviously likely to be lower than it is for a mass market product.

The size of the marketing expenditure budget will depend on* The firm’s overall financial position. The amount of money allocated to a particular function such as marketing will inevitably depend on what it has available to spend in total.

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In a successful year it is easier to have a bigger budget than in an unsuccessful year. On this basis the marketing budget is likely to be lower when sales are lower and bigger when they are higher. This is often what actually happens within organisations although in many ways this is not a particularly sensible way to budget. In unsuccessful years the budget should arguably be higher (not lower) in order to improve the firm’s sales, assuming of course that the firm can raise the funds needed to finance this. Unfortunately, though, the size of the budget does not just depend on what the firm would like it to be – it must depend on what the firm actually has available or what funds it can raise; as a result the budget may be lower at precisely the time when managers would like to increase it

* The firm’s marketing objectives and strategy. The amount of money allocated for marketing activities should clearly depend on what the firm is trying to achieve and the returns it expects to gain from its plans. When first launching a product, for example, the promotional budget is likely to be higher than it is for a more established product. Similarly when first entering a new segment, spending on market research may be higher than in a ‘normal’ year.* The amount the firm expects to receive back is also of critical importance: a firm is likely to be prepared to spend more marketing a project with a high rate of return than on one which has a low expected rate of return* Competitors. A firm’s budget is very likely to be affected by the amount its competitors are spending. If its competitors increase their spending on product development or promotion, for example, a firm may feel it necessary to increase its own expenditure to maintain its competitive position.Of course just because a firm has a large marketing budget does not mean that its marketing is necessarily more effective; the effectiveness of marketing activities will depend in part on the funds available but it will also depend on whether the right activities have been chosen in the first place and how effectively they are being implemented.

Setting the marketing budget

The marketing budget should be set in consultation with those who will be responsible for undertaking the activities it involves. The amount of money to be spent on marketing overall, for example, should be agreed with the marketing manager. Given that the marketing manager is the person who will be held accountable if the budget is not hit he or she would obviously be involved in deciding what the figure should be.By involving the people who will actually have to achieve these financial targets the firm is more likely to gain their commitment. If instead people are simply told that they have to achieve certain targets without any prior discussion they are unlikely to feel much ownership of the budgets and as a result are unlikely to be committed to them. They may resent the fact they have not been involved in the process of setting the targets and consequently they may not be motivated to achieve them.Furthermore the process of discussing the targets may well highlight important issues which the superiors need to be aware of; the people who implement the policies are the ones who are most likely to know what is and what is not feasible and it therefore makes sense to make use of their expertise.However, it is important not to get involved with prolonged negotiations over the size of a budget if this delays decision making for too long. The process of budget setting can at times be quite slow and it is important to make sure it does not prevent managers from getting on with the job in hand.Also superiors must be aware that subordinates may well try to set targets which suit themselves rather than the organisation. It is perfectly natural, for example, for people to exaggerate the likely costs of a project to make sure that they will be able to stay within their expenditure budgets. Similarly employees may set relatively low sales targets to make sure they are easy to hit.It is also important for managers to consider the size of the marketing budget in the context of the overall spending and income of the firm. Resources diverted towards marketing are clearly not available for use elsewhere and so there is an opportunity cost which should be taken into account. As well as the overall size of the budget managers must also consider the timing of the payments and earnings inA sales forecast may be produced in a number of ways in relation to the firm’s overall cashflow position. A major marketing campaign, for example, may involve very heavy expenditure and managers must ensure this does not lead to liquidity problems.

Sales forecasting

A key element of a marketing plan is the sales forecast. This sets out targets for overall sales and for particular products and services. A sales forecast acts as a goal against which a firm can measure its progress. It also drives many other decisions within the firm. For example* The production schedule will have to be closely linked to the sales forecasts to ensure the firm has the appropriate mix and number of products at the right time* The sales forecast will also influence the cash flow forecast; only by knowing what sales are expected to occur can the finance department estimate cash inflows. Having compared the expected inflows with expected cash outflows the finance function can then decide if particular steps need to be taken such as arranging overdraft or loan facilities* Human resource decisions will also depend on the expected level of sales. Decisions about staffing levels and the allocation of staff to particular duties will inevitably be determined by the expected sales levels. Strong sales growth may require more recruitment, for example.Producing a sales forecast* It may be based on backdata (i.e. data from the past). The firm may look at sales levels in previous years, identify an underlying trend and extrapolate from this. A holiday company experiencing a fall in the number of enquiries in a particular month compared to past years may change its sales forecast downwards. This technique is useful, provided the trends identified in the past continue into the future. If, in fact, there has been a major shift in buying patterns (egg the timing of buying has changed) extrapolation could be misleading.*

The firm may use market research to try to identify likely future trends. The value of this research depends on whether it is primary or secondary and the quality of the information. If a small sample is used, for example, the forecast is less likely to be accurate than if a larger sample had been used.* It may be based on the firm’s best guess. Managers could use their own experience or hire industry experts for their opinion of what is most likely to happen. This approach to forecasting is common if the rate of change in the market is great or if the firm is facing a new scenario and does not have past data to build on.The method of forecasting used by a firm will depend on the nature of the product and the market situation. When the National Lottery was launched in the UK, for example, Camelot (the organiser of the lottery) could have forecast sales by looking at existing national lottery systems in other countries and adjusting these data to take account of the differences in culture and the precise nature of the system in the UK. Camelot might also have used secondary research to identify gambling trends within the UK and primary research to identify customers’ likely reaction to the lottery scheme. However, although the company probably used very sophisticated research techniques it is likely there was also an element of hunch in there too. After all, it was a completely new product within the UK and so there were no past data within this country to build on. Obviously once the lottery had been up and running for a few months the organisers were able to make better predictions of expected weekly sales because they were accumulating backdata and gaining a better insight into the market.

Test marketing

To help predict its future sales a firm may decide to try out a product or service in a test market. A test market is a representative selection of consumers which the firm uses to try out a new product. Having seen the results in the test market the firm can estimate how the product might sell elsewhere and product a sales forecast. By using a test market the firm can see customers’ reactions before committing to a full-scale launch. If necessary, changes can still be made before the product is widely available. Many film companies, for example, show their films to a test audience before they go on general release to assess the public’s reaction.The disadvantage of using test marketing is that competitors have an opportunity to see what you are planning to launch. This gives them time to develop a similar product and race you to launch first on a wide scale.A test market may also give misleading results. This might be because the test market chosen is not representative or because competitors’ actions lead to misleading results. For example, rivals might increase their promotional activities in the test market to reduce a firm’s sales and lead it to believe that the new product will not do well.Why might forecasts be wrong?Forecasts can only be predictions of the future. They may well be wrong because:* Customer-buying behaviour changes suddenly, e.g. customers suddenly decide a product is unsafe or unfashionable* The original market research was poor. This may be because the sample was too small or was unrepresentative. Alternatively it may be because the results were wrongly interpreted; this could be because the firm was in a rush to launch the product. In some cases the research may actually have been ignored – managers may have been certain that they knew best and gone ahead with the decision regardless of the findings of market research* The experts were wrong; even the best-informed people can misread a situation and make mistakes – just look at the predictions of so-called experts before any horse race or football match or look at the many different and often conflicting forecasts of growth in the economy that are often published in the papers.Inevitably a firm’s external and internal conditions are likely to change and this can make it extremely difficult to estimate future sales. However, this does not necessarily make forecasting a useless management tool. The simple process of forecasting makes managers think ahead and plan for different scenarios. This may help to ensure they are much better prepared for change than if they did not forecast at all.Also even though a forecast may not be exactly accurate it may give an indication of the direction in which sales are moving and some sense of the magnitude of future sales which can help a firm’s planning. Ultimately it may not matter much whether sales are 2,000,002 units or 2,000,020 units but it makes a big difference whether they are 2m or 4m in terms of staffing, finance and production levels i.e. provided the forecast is approximately right it can still be very useful even if it is not exactly correct.It is also important to remember that sales forecasts can be updated. A firm does not have to make a forecast and leave it there. As conditions change and new information feeds in, the managers can update the forecast and adjust accordingly.The reliability of forecastsForecasts are most likely to be correct when* A trend has been extrapolated and the market conditions have continued as before* A test market is used and is truly representative of the target population* The forecast is made by experts (such as your own salesforces) and they have good insight into the market and future trends.* The firm is forecasting for the near future. It is usually easier to estimate what sales will be next week compared to estimating sales in five years’ time