The amount that a company may spend on its total promotional effort, which consists of advertising, personal selling, and sales promotion, is not easy to determine. There are no unvarying standards to indicate how much should be spent on promotion in a given product/market situation. This is so because decisions about promotion expenditure are influenced by a complex set of circumstances.

Promotion-Expenditure Strategy Promotion expenditure makes up one part of the total marketing budget. Thus, the allocation of funds to one department, such as advertising, affects the level of expenditure elsewhere within the marketing function. For example, a company may need to choose between additional expenditures on advertising or a new package design. In addition, the perspectives of promotion expenditure must be examined in the context of pricing strategy. A higher price obviously provides more funds for promotion than does a lower price. The amount set aside for promotion is also affected by the sales response to the product, which is very difficult to estimate accurately. A related matter is the question of the cumulative effect of promotion. The major emphasis of research in this area, even where the issue is far from being resolved, has been on the duration of advertising effects. Although it is generally accepted that the effects of advertising and maybe the effects of other forms of promotion as well may last over a long period, there is no certainty about the duration of these benefits. The cumulative effect depends on the loyalty of customers, frequency of purchase, and competitive efforts, each of which may be influenced in turn by a different set of variables. Promotion expenditures vary from one product/market situation to another. Consider the case of McDonald’s. It spent $330.8 million on television advertising in 1997, over twice as much as its rival Burger King. Yet the research showed that viewers remembered and liked Burger King’s ads better than McDonald’s. There is no way to be sure if McDonald’s advertising budget was more than optimum. Similarly, the best-known and best-liked television ad in 1997 was for Miller Lite, a commercial showing people arguing whether Miller tasted great or was less filling. This campaign performed better than all other beer commercials even though several companies spent more money on their campaigns than Miller did. Again, despite the ad’s success, it is difficult to say if Miller’s budget was optimum. Promotion, however, is the key to success in many businesses.

To illustrate this point, take the case of Isordil, a brand of nitrate prescribed to heart patients to prevent severe chest pains. Made by the Ives Laboratories division of the American Home Products Corporation, it was introduced in 1959 and has since grown to claim almost 50 percent of a $200-million-a-year market. Ives claims that Isordil is longer acting and in certain ways more effective than other nitrate drugs on the market. No matter that the Food and Drug Administration has not yet approved all of the manufacturer’s claims, nor that some doctors think that Isordil differs little from competing drugs Ives has promoted its nitrate so aggressively for so long that many doctors think only of Isordil when they think of nitrates. The success of Isordil illustrates the key importance of promotion: Indeed, the very survival of a drug in today’s highly competitive marketplace often depends as much on a company’s promotion talents as it does on the quality of its medicine. Promotion induces competitors to react, but there is no way to anticipate competitive response accurately, thus making it difficult to decide on a budget. For example, during the decade from 1980 to 1990, the promotional costs of Anheuser-Busch rose by $6 a barrel of beer (from $3 in 1980 to $9 in 1990). Although the company has been able to prevent Miller’s inroads into its markets, the question remains if continuing to increase ad budgets is the best strategy. Despite the difficulties involved, practitioners have developed rules of thumb for determining promotion expenditures that are strategically sound. These rules of thumb are of two types: they either take the form of a breakdown method or they employ the buildup method.

Breakdown Methods. There are a number of breakdown methods that can be helpful in determining promotion expenditures. Under the percentage-of-sales approach, promotion expenditure is a specified percentage of the previous year’s or predicted future sales. Initially, this percentage is arrived at by hunch. Later, historical information is used to decide what percentage of sales should be allocated for promotion expenditure. The rationale behind the use of this approach is that expenditure on promotion must be justified by sales. This approach is followed by many companies because it is simple, it is easy to understand, and it gives managers the flexibility to cut corners during periods of economic slowdown. Among its flaws is the fact that basing promotion appropriation on sales puts the cart before the horse. Further, the logic of this approach fails to consider the cumulative effect of promotion. In brief, this approach considers promotion a necessary expenditure that must be apportioned from sales revenue without considering the relationship of promotion to competitor’s activities or its influence on sales revenues. Another approach for allocating promotion expenditure is to spend as much as can be afforded. In this approach, the availability of funds or liquid resources is the main consideration in making a decision about promotion expenditure. In other words, even if a company’s sales expectations are high, the level of promotion is kept low if its cash position is tight. This approach can be questioned on several grounds. It makes promotion expenditures dependent on a company’s liquid resources when the best move for a cash-short company may be to spend more on promotion with the hope of improving sales. Further, this approach involves an element of risk. At a time when the market is tight and sales are slow, a company may spend more on promotion if it happens to have resources available. This approach does, however, consider the fact that promotion outlays have long-term value; that is, advertising has a cumulative effect. Also, under conditions of complete uncertainty, this approach is a cautious one. Under the return-on-investment approach, promotion expenditures are considered as an investment, the benefits of which are derived over the years. Thus, as in the case of any other investment, the appropriate level of promotion expenditure is determined by comparing the expected return with the desired return. The expected return on promotion may be computed by using present values of future returns. Inasmuch as some promotion is likely to produce immediate results, the total promotion expenditure may be partitioned between current expense and investment. Alternatively, the entire promotion expenditure can be considered an investment, in which case the immediate effect of promotion can be conceived as a return in period zero. The basic validity and soundness of the return-on-investment approach cannot be disputed. But there are several problems in its application. First, it may be difficult to determine the outcomes of different forms of promotion over time. Second, what is the appropriate return to be expected from an advertising investment? These limitations put severe constraints on the practical use of this approach.

The competitive-parity approach assumes that promotion expenditure is directly related to market share. The promotion expenditure of a firm should, therefore, be in proportion to that of competitors in order to maintain its position in the market. Thus, if the leader in the industry allocates two percent of its sales revenue for advertising, other members of the industry should spend about the same percentage of their sales on advertising. Considering the competitive nature of our economy, this seems a reasonable approach. It has, however, a number of limitations. First, the approach requires a knowledge of competitors’ perspectives on promotion, and this information may not always be available. For example, the market leader may have decided to put its emphasis not on promotion per se but on reducing prices. Following this firm’s lead in advertising expenditures without reference to its prices would be an unreliable guide. Second, one firm may get more for its promotion dollar through judicious selection of media, timing of advertising, skillful preparation of ads, a good sales supervision program, and so on. Thus, it could realize the same results as another firm that has twice as much to spend. Because promotion is just one of the variables affecting market performance, simply maintaining promotional parity with competitors may not be enough for a firm to preserve its market share.

Buildup Method. Many companies have advertising, sales, and sales promotion (merchandising) managers who report to the marketing manager. The marketing manager specifies the objectives of promotion separately for the advertising, personal selling, and sales promotion of each product line. Ideally, the spadework of defining objectives should be done by a committee consisting of executives concerned with product development, pricing distribution, and promotion. Committee work helps incorporate inputs from different areas; thus, a decision about promotion expenditure is made in the context of the total marketing mix. For example, the committee may decide that promotion should be undertaken to expose at least 100,000 households to the product; institutional customers may be sought through reductions in price. In practice, it may not always be easy to pinpoint the separate roles of advertising, personal selling, and sales promotion because these three methods of promotion usually overlap to some degree. Each company must work out its own rules for a promotion mix. Once the tasks to be performed by each method of promotion have been designated, they may be defined formally as objectives and communicated to the respective managers. On the basis of these objectives, each promotion manager probably redefines his or her own goals in more operational terms. These redefined objectives then become the modus operandi of each department. Once departmental objectives have been defined, each area works out a detailed budget, costing each item required to accomplish the objectives of the program. As each department prepares its own budget, the marketing manager may also prepare a summary budget for each of them, simply listing the major expenditures in light of the overall marketing strategy. A marketing manager’s budget is primarily a control device. When individual departments have arrived at their estimates of necessary allocation, the marketing manager meets with each of them to approve budgets. At that time, the marketing manager’s own estimates help assess department budgets. Finally, an appropriation is made to each department. Needless to say, the emphasis on different tasks is revised and the total budget refigured several times before an acceptable program emerges. Acommittee instead of just the marketing manager may approve the final appropriation for each department. The buildup method forces managers to analyze scientifically the role they expect promotion to play and the contribution it can make toward achieving marketing objectives. It also helps maintain control over promotion expenditure and avoid the frustrations often faced by promotion managers as a result of cuts in promotion appropriations due to economic slowdown. On the other hand, this approach can become overly scientific. Sometimes profit opportunities that require additional promotion expenditure may appear unannounced. Involvement with the objective and task exercise to decide how much more should be spent on promotion takes time, perhaps leading to the loss of an unexpected opportunity.