Page 169 - DMGT507_SALES AND PROMOTIONS MANAGEMENT

Unit 9: Sales Promotion

This trend is gradually catching up in our country with increased availability of Broadband Notes
Internet and more and more households acquiring computers.

9.3 Budget Allocation

The allocation of monetary resources to sales promotion is determined by the promotion strategy
of the firm. When the monetary resources are allocated to promotion, managers often wonder
whether they have allocated the right amount. Most major firms keep a contingency reserve. In
most cases, first the total amount of money for promotion is determined and then it is budgeted
for different activities. Before deciding the allocation of funds to sales promotion, the
management should evaluate relevant factors such as type of the product, its stage in PLC, the
market situation and level of competitive activity etc. All these factors, alone or in combination,
can significantly affect the promotional budget.

Commonly used Budgeting Methods

There are five important techniques, which are commonly used to allocate funds to sales
promotion.
1. Percentage of Sales Method: The percentage of sales method to allocate the funds is probably
most popular among companies. In this approach, the budget is determined by taking a
fixed percentage of sales. The sales figure taken could pertain to previous year, or the
average of several past years. This percentage could also be based on the forecasted sales
of the year under consideration. A definite advantage of this approach is that the
expenditures are directly related to the sales. If a company sold more in the last year or the
average sales of previous years was more, it is assumed that the company would have
more funds for promotion budget this year. The method is quite simple and the calculation
is easy and understandable.
The technique suffers from some serious limitations, though. The assumption inherent in
this method is that the promotion is a result of sales rather than a cause. This method also
does not consider the possibility that sales may decline because of too little promotion or
increased competitive activity, or that the sales do not take advantage of a rising potential.
Using percentage of sales approach to arrive at promotion budget may mean under-
spending when the market opportunities are high and overspending when the market
potential is low. In using percentage of sales approach, it would be advantageous not only
to consider the past sales but also the sales forecast for the next year. In spite of these
limitations, this method remains a fairly popular method. However, this method cannot
be used for a new company.
2. Unit of Sales Method: companies dealing in high priced products, generally consumer
durable goods, such as four and two wheeler autos, refrigerators, washing machines,
microwave ovens, entertainment electronics and many other items, commonly use this
method. Instead of rupee-value of sales as in the previous method, the base is the physical
volume of either the past or anticipated sales. This figure of units is then multiplied by a
fixed amount of money to reach the budget amount.

Example: A two-wheeler auto manufacturer might allocate 2,000 per unit for sales
promotion.

The advantages and the limitations of this approach are the same as those of the already
mentioned percentage of sales method. It has the same convenience of simplicity as well
as the shortcomings.

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