Marketing Communications

188 CHAPTER 6 BUDGETS

medium-size enterprises. Marketing communications are considered to be a pure cost rather

than an investment and are mostly not part of the strategic plan, neither are any concrete

communications goals defi ned. As a result, it is a technique without any focus on strategic

market or brand issues. Th is approach will never lead to optimal budgeting, since some

opportunities will be lost because of lack of investment-proneness.

Percentage of sales

In this technique, budgets are defi ned as a percentage of the projected sales of the next year.

An alternative to this technique is to take the communications outlays of the past year as a

basis and then add a certain percentage, based on the projected sales growth of the following

year. Th ese techniques are very popular in many companies due to their ease of use. Th e

percentages used by companies diff er. Some sources indicate that they fl uctuate around an

average of 5%.^12 Other authors speak of percentages between 0.5% and 10%.^13 A l t h o u g h

they are commonly used and, like the affordability method , ensure that costs do not threaten

profi ts, these budgeting methods have some notable disadvantages. Th e percentage of sales

budgeting method could lead to overspending in markets in which these kinds of investments

are not needed and at the same time communications budgets might be too small where they

might have had a major impact. Decreasing returns on sales will lead to smaller commu-

nications budgets, which will certainly not help to change the negative sales evolution.

Communications budgets should not be the result of sales but rather should create demand

and thus push up sales. Th is technique also defends the theoretical insight that sales are

dominated by communications investments and that other marketing mix elements do not

have an impact on sales. Th is technique does not consider any potential sales growth areas

and will limit sales performance.

Another common way of using the percentage of sales method is to take the sales of the past

year instead of projected sales, but that is even worse. Th is method uses past performance as a

ceteris paribus situation. Th erefore, it is unlikely that the company will make progress (unless a

lucky wind changes the competitive environment or consumer demands in the right direction).

A last variant of this method is to take a percentage of profi ts instead of sales. Th is has the

same disadvantages, as an existing brand might need less advertising than a recently launched

brand which is not making any profi t at all during the fi rst year. Losses will lead to cancelling

communications budgets and thus to abandoning all hope instead of investing in brand

communications to make them profi table again.

Competitive parity

Competitive parity budgeting means that companies look at the amount of money competitors

spend on communications and then copy their budgets. Th e logic of this method lies in the fact

that the collective behaviour of a market will not skew much of the budget optimum. Th e

advantage of this method is that the market will not be destabilised by over-investments or

extremely low promotional budgets. Th is method is oft en used in fast-moving consumer goods

where sales are believed to be highly infl uenced by advertising and communications spending.

Nevertheless, the theoretical basis of this method has some disadvantages. Th e underlying

assumption is again that promotional spendings are the only variable that infl uences sales.

Furthermore, a company assumes that the competitor’s communications budget was set in an

eff ective and effi cient way. Lastly, this method implies that resources, operational methods,

opportunities and objectives of competitors used as a benchmark are exactly the same as

those of the company itself. Th ese are three quite dangerous assumptions. Companies may

have other market defi nitions or other targets, leading to other activities and products in

other stages of their life cycle, which make comparisons a diffi cult and unreliable technique for

fi nancial decisions. Th e parity method is also based on historical data and not on competitors’

plans for the future. Believing that competitors will adhere every year to the same communica-

tions eff orts is probably not the best analytical way to make marketing plans.

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