Competitive Parity method:
Some companies set their promotion budget to achieve share-of-voice parity with competitors. Two arguments are made in support of the competitive-parity method. One is that competitors’ expenditures represent the collective wisdom of the industry. The other is that maintaining competitive parity prevents promotion wars. Neither argument is valid. There are no grounds for believing that competitors know better. Company reputations, resources, opportunities, and objectives are much different and promotion budgets are hardly a guide. Furthermore, there is no evidence that budgets based on competitive parity discourage promotional wars.
Objective and task Method:
The objective-and-task method calls upon marketers to develop promotion budgets by defining specific objectives, determining the tasks that must be performed to achieve these objectives and estimating the costs of performing these tasks. The sum of these costs is the proposed promotion budget.
For examples, suppose Cadbury Schweppes wants to introduce a new natural energy drink called Sunburst for the casual athlete.
1. Establish the market share goal – The Company estimates 50 million potential users and sets a target of attracting 8% of the market – that is, 4 million users.
2. Determine the percentage of the market that should be reached by advertising – The advertiser hopes to reach 80% (40 million prospects) with the advertising message.
3. Determine the percentage of aware prospects that should be persuaded to try the brand – The advertiser would be pleased if 25% of aware prospects (10million) tried Sunburst. This is because it estimates that 40% of all samplers or 4 million people would become loyal users. This is the market goal.
4. Determine the number of advertising impressions per 1% trial rate – The advertiser estimates that 40 advertising impressions (exposures) for every 1% of the population would bring about a 25% trial rate.
5. Determine the number of gross rating points that would have to be purchased – A gross rating point is one exposure to 1% of the target population. Because the company wants to achieve 40 exposures to 80% of the population, it will want to buy 3,200 gross rating points.
6. Determine the necessary advertising budget on the basis of the average cost of buying a gross rating point – To expose 1% of the target population to one impression costs an average of $3,277. Therefore, 3,200 gross rating points would cost $10,486,400 (= $3,277 x 3200) in the introductory year.
The objective-and-task method has the advantage of requiring management to spell out its assumption about the relationship among dollars spent, exposure levels, trial rates, and regular usage.
A major question is how much weight marketing communications should receive in relation to alternatives such as product improvement, lower prices, or better service. The answer depends on where the company’s products are in their life cycles, whether they are commodities or highly differentiable products, whether they are routinely needed or have to be “sold” and other considerations.
Marketing communication budgets tend to be higher when there is low channel support, much change in the marketing program overtime, many hard-to-reach customers, more complex customer decision making, differentiated products and non-homogeneous customer needs, and frequent product purchases in small quantities.