Marketing Communications

186 CHAPTER 6 BUDGETS

Communications budgeting methods

Table 6.1 lists the various communications budgeting methods.

Marginal analysis

Th e basic principle of marginal budgeting analysis is quite obvious: to invest resources as long

as extra expenses are compensated by higher extra returns. Marketers should invest in pro-

motional or communications eff orts as long as their marginal revenue exceeds the marginal

communications cost (optimum point indicated in Figure 6.3 ). Profi t is calculated as the

diff erence between gross margin and communications expenditures. It is clear that sales and

gross margin will increase with higher communications eff orts, but will level off , which leads

to lower profi ts and eventually loss. Th is analysis has the advantage of estimating the eff ect of

advertising on profi ts, and derives a normative rule of optimal advertising eff orts. However,

the analysis remains largely theoretical because of the problems involved in estimating the

sales response relation. As a result, marginal analysis is seldom used as a practical budgeting

method.^11

A frequently used and simple sales response model, taking long-term and short-term effects into account, is the

following (numbers are exemplary):

S t = 250 + 1.4 A t + 0.6 S t (^) − 1
where: S t = sales in period t
S t (^) − 1 = sales in period t − 1
A t = advertising in period t
250 = constant term expressing that even if there were no advertising at all in period t or in the past, sales
would still be €250
The short-term effect of advertising is the coefficient of A t. Every €1000 invested in advertising results in €1400
extra sales. The coefficient of S t (^) − 1 summarises the effect of all advertising efforts in the past. The long-term effect
of advertising on sales is calculated as 1.4/(1 − 0.6) = 3.5. This means that, in the long run, every €1000 invested
in advertising results in 3500 extra sales.
RESEARCH INSIGHT
Calculating the short-term and long-term effects of advertising
Table 6.1 Communications budgeting methods
z Marginal analysis
z Inertia
z Arbitrary allocation
z Affordability
z Percentage of sales
z Competitive parity
z Objective and task
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