Transcript Judgmental Budget

Business / Marketing Minor
Marketing Fundamentals
M21439
Session 7:
Devising & Justifying Budgets
Key Concepts
• Costs and budgets
• Profit & Loss Account
• Methods of devising budgets
• Forecasting sales
• Dimensions of a market analysis
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.”
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.
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!
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
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.
Profit & Loss Account
£000
LESS
LESS
Turnover (PRICE)
6,000
Cost of Sales (PRODUCT)
4,000
GROSS PROFIT
2,000
Other Costs
100
Operating Expenses
850
950
OPERATING PROFIT
1,050
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
Costs – Changing Categories
Costs may change marketing mix category
depending upon the organisation.
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
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
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
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
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
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
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
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
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
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
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 3rd ed, UK:Prentice Hall, p.593-594
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 3rd ed, UK:Prentice Hall, p.593
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 3rd ed, UK:Prentice Hall, p.593
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 3rd ed, UK:Prentice Hall, p.593
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 3rd ed, UK:Prentice Hall, p.593
Data-Based Budget Setting
1. Competitive parity
2. Objective and task budgeting
Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593-594
Data-Based Budget Setting –
Competitive Parity
Involves discovering what the competition is
spending and then matching or exceeding it.
Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593-594
Data-Based Budget Setting –
Objective & Task
Objectives are defined and then costs are
defined based on what needs to be done to
achieve those objectives.
Source: Brassington,F. & Pettitt,S. (2003) Principles of Marketing 3rd ed, UK:Prentice Hall, p.593-594
Composite Budgeting
Many organisations use a combination of
budgeting techniques to devise and justify
their proposed spend.
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
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
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
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
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
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
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 5th ed, USA:Wiley, p.79
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 3rd ed, UK:Prentice Hall, p.593