1. Business / Marketing Minor Marketing Fundamentals M21439 Session 7: Devising & Justifying Budgets

2. Key Concepts Costs and budgets Profit & Loss Account Methods of devising budgets Forecasting sales Dimensions of a market analysis

3. Why Do You Need To Devise A Budget? Bayne (1997) states that “Management likes to know where it has spent its money … and there is never enough money to do everything you would like to do when it comes to marketing.”

4. Devising & Justifying Budgets A detailed marketing plan allows marketers to plan and budget for marketing activities in a logical and detailed manner. The structure of the plan allows all personnel to understand the detail of the proposed campaign and its relationship to the organisations mission and objectives.

5. Costs & Budgets If the cost of implementing the strategies and carrying out the action plans is greater than the contribution to company profits resulting from the additional sales forecast in the plan – you might as well forget the plan now!

6. Top & Bottom of Budget Setting TOP-DOWN Determined by senior executive BOTTOM-UP Determined by functional specialists Source: Pickton,D. & Broderick,A. (2001) Integrated Marketing Communications UK:Prentice Hall, p.442

7. Revenue Price is the only element of the marketing mix which gives the organisation revenue. All the other elements are a cost to the organisation.

8. Profit & Loss Account £000 Turnover (PRICE) 6,000 LESS Cost of Sales (PRODUCT) 4,000 GROSS PROFIT 2,000 Other Costs100 LESS Operating Expenses850 950 OPERATING PROFIT 1,050

9. Examples of ‘Other Costs & Operating Expenses’ PROMOTION: - Advertising - PR - Sponsorship - Exhibitions PLACE: - Agents Fees - Distribution costs PEOPLE: - Salaries - Recruitment PROCESS: - Administration costs - Data processing costs PHYSICAL PRESENCE: - Literature - Car costs - Travel

10. Costs – Changing Categories Costs may change marketing mix category depending upon the organisation.

11. Methods of Devising Budgets 1.Based on Last Year’s Marketing Budget 2.Based on a Percentage of Company Sales 3.Based on a Percentage of the Total Marketing Budget 4.Based on a Reallocation of Marketing Funds 5.Based on What Other Companies in the Industry are Spending 6.Based on Creating an Effective Presence 7.Based on a Graduated Plan Tiered into Measurable Results 8.Based on a Combination of Several Factors Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

12. Based on Last Year’s Marketing Budget If already has a presence in the market: -evaluate what worked and didn’t last year -consider what costs have changed since the previous year -review this year’s objectives -make appropriate adjustments Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

13. Based on a Percentage of Company Sales -Based on a percentage of the forecasted sales for the year/quarter/month. -Based on actual sales (could be considered as the tail wagging the dog). -The exact percentage may change from industry/organisation. Further research is needed. Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

14. Based on a Percentage of the Total Marketing Budget -Assumes that the marketing for each product is not complementary or equal in the marketing mix. -May depend how much the company relies on the product. -Some products may need to be supported more than others. Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

15. Based on a Reallocation of Marketing Funds -Assumes that some activities may be decreased or eliminated while others take up the slack. -If a product fails to meet its projections then funds may be removed at short notice. Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

16. Based on What Other Companies in the Industry Are Spending -Certain organisations can provide advertising spend by industry and company. -Depends upon what industry the organisation considers itself to be in. -Depends on the organisation’s strategy in that specific market e.g. market leader or follower. -Depends on the purpose of marketing to the organisation e.g. PR or sales only. Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

17. Based on Creating an Effective Presence -Looks at the actual activities needed to create a marketing presence and allocates funds accordingly. -One of the least often used methods, especially by those companies that need it the most. Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

18. Based on a Graduated Plan Tiered into Measurable Results -Assumes that the product will be continued and will grow from year to year. -Assumes also that there will be a continued demonstration of either a return on investment or some type of positive effect. Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

19. Based on a Combination of Several Factors -Marketing success is so intangible that one cannot rely on just one approach to budgeting. -Best approach may include a combination of all the previously mentioned methods. -If preparing a budget for a new product is may be worth preparing three budgets – a low one, medium one and high one – in terms of total spend. Source: Bayne,K.M. (1997) The Internet Marketing Plan USA:Wiley

20. Budgeting Budgeting methods need to be developed to produce a realistic figure for the marketer to work with in order to achieve objectives. The main budget setting methods: - Judgmental - Data based

21. Judgmental Budget 1.Arbitrary Budgets 2.Affordable method 3.Percentage of past sales method 4.Percentage of future sales method Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593-594

22. Judgmental Budget - Arbitary Based on what has always been spent in the past or, for a new product, on what is usually spent on that kind of thing. Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593

23. Judgmental Budget - Affordable Closely linked to arbitrary budgets and imposes a limit based either on what is left over after other more important expenses have been met or on what the company feels to be the maximum allowable. Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593

24. Judgmental Budget - % of Past Sales Marketing budget based entirely on past sales performance. Budget is a percentage of sales and the percentage may differ from organisation to organisation. Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593

25. Judgmental Budget - % of Future Sales Marketing budget based entirely on future sales performance. Budget is a percentage of future sales and the percentage may differ from organisation to organisation. Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593

26. Data-Based Budget Setting 1.Competitive parity 2.Objective and task budgeting Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593-594

27. Data-Based Budget Setting – Competitive Parity Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593-594 Involves discovering what the competition is spending and then matching or exceeding it.

28. Data-Based Budget Setting – Objective & Task Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593-594 Objectives are defined and then costs are defined based on what needs to be done to achieve those objectives.

29. Composite Budgeting Many organisations use a combination of budgeting techniques to devise and justify their proposed spend.

30. Forecasting Sales Companies commonly use a three stage procedure to arrive at a sales forecast: 1.Environmental forecast 2.Demand forecast 3.Company sales forecast Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.266

31. Forecasting – What? There are four main heading under which sales forecasting techniques can be placed: 1.What is there – total market demand. 2.What people think – what customers or potential customers/stakeholders think. 3.What happened when – new product forecasting methods. 4.What happened – use of pattern of past sales, or other items, to estimate the future. Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

32. What Is There 1.Market build up – identifies all the potential buyers in each market and estimates their potential purchases. 2.Chain ratios – multiplies a base number by a chain of adjusting percentages. 3.Market-factor index – estimates the market potential for consumer goods. Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

33. What People Think Subjective methods including: - Buyers’ intentions - Salesforce opinion - Experts’ opinion Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

34. What Happened When Two types: 1.Integrative – Cross impact analysis, scenario writing 2.Experimentation - Concept testing, test marketing Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

35. What Happened Three types: 1. Sales – time series, curve fit 2.Technology – S-curve diffusion, technology substitution, trend analysis 3.Causal – statistical demand analysis, multivariate sales forecasting Source: Hooley,G.J., Saunders,J.A. & Piercy,N.F.(1998) Marketing Strategy & Competitive Positioning UK:Prentice Hall, p.268

36. Dimensions of a Market Analysis Actual and potential market size Market growth Market profitability Cost structure Distribution systems Trends and developments Key success factors Source: Aaker,D.A. (1998) Strategic Market Management 5 th ed, USA:Wiley, p.79

37. Developing Campaigns The marketer has to develop campaigns with (often) tight budgets, or fight for a larger share of available resources. It is important to develop a budgeting method that produces a realistic figure for the marketer to work with in order to achieve objectives. Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3 rd ed, UK:Prentice Hall, p.593