[MUSIC] Nice to see you again. One of the most difficult marketing decisions is determining how much to spend on promotion. Industries and companies vary considerably in how much they spend on promotion. Expenditure may be up to 40-45% of sales in the cosmetic industry and 5 to 10% in the industrial equipment industry. The most common method used to decide the promotion budget are the affordable method, the percentage of sales method, the comparative parity method, and real objective and task method. However, there are other methods focused on financial considerations. I will start by explaining to you the main methods. The affordable method sets the promotion budget based on what they think the company can afford. It completely ignores the role of the promotion as an investment. And the immediate impact of the promotions on sales volume. It leads to an uncertain annual budget which makes long range planning very difficult. The second method is the percentage of sales method. Promotion expenditure is set at a specific percentage of sales or of the sales price, for example, the car manufacturers use the percentage of sales whereas the old companies used the fraction of the currency per liter of gallon of petrol. Supporters of this method see a number of advantages. That expenditure will rise with what the company can afford. That it encourages management to think of the relationship between the promotion cost, selling price and the profit per unit. And finally, it encourages stability when competing firms expend similar percentages. However, there are also several drawbacks. It views sales as the determiner of a promotion rather than as the result. A second drawback is that it leads to a budget set by the availability of funds rather than by the market opportunity. It discourages experimentation with counter cyclical promotion or aggressive spending. There is a huge dependence on year to year sales fluctuations interfering with the long term planning. And there is no logical basis for choosing the specific percentage. Except that it has been done in the past or what the competition is doing. And finally, it does not encourage building the promotion budget by determining what each product deserves. There is a third method, that is the competitive parity method. The budget is set to achieve share of parity with competitor. There are two arguments to support this method. One is that the competitor's expenditure represents the collective wisdom in the industry and the second one that prevents promotional worth. But neither argument is realy valid. And finally, the fourth method is the objective and task method. It causes marketers to develop promotion budgets by defining specific objectives, determining the task that must be performed to achieve these objectives, and estimating the cost of performing this task. The sum of this cost is the proposed promotional budget. The advantage of this method is that it requires management to declare its assumptions about the relationship between the amount to spend, exposure levels, trial rates and regular usage. A major question is, how much weight marketing communication should receive in relation to alternatives such as marketing offering improvement, lower prices, or better service. It usually depends on where the company's market offering products are in their life cycles, whether they are commodities or highly differentiated products, whether they are routinely needed or must be sold and budgets tend to be higher when there is low channel support, much change in the marketing program over time, many hard to reach consumers, more complex consumer decision making, differentiate in products, and non homogeneous customer needs and frequent product purchases in small quantities. As I mentioned before there are other methods that focus on financial considerations, for example, modeling. It uses a variety economic and simulation techniques to model how diverse a spend level will affect performance in terms of awareness rating, revenue flow, and profitability. Unilever uses one of these methods. Another one would be the pay back period, it calculates the amount of exposure time needing to redeem the budget cost of the marketing communication. And a third system is the profit optimization, seeks to track the point at which the marginal revenue from the expense exceeds the marginal cost. Ideally, marketing managers should establish the total communication budget so that the marginal profit from the last communication Euro just equals the marginal profit from the last Euro in the best communication cases. However, implementing this principle is impossible, as consumer responses are influenced by dynamic variables, many of which are beyond the control of marketing management. Senior managers, in addition, they want to know the outcomes and revenues resulting from the communications investment. They need to measure the marketing communication impact on the target audience. Based at least on the brand awareness, the brand trial and the satisfaction. Consumers should be asked about their brand awareness. Whether they recognize or recall the message, how many times they saw it, what points they recall, how they feel about the message. When we talk about brand trial, we need to find out previous and current attitudes towoard the product and the company. And how many people bought the product. And finally, from the satisfaction point of view, we concentrate more in the behavioral measures of all this response. Such as how many people like the product and talk to others about it. In the following example we can see that the communication campaign for brand A was effecting in creating brand awareness, but the market offering failed to meet consumer expectations. On the other side, with brand B awareness was low, few tried it, but satisfaction was very high. So it means that they needed to strengthen the communications to take advantage of the brand's power. Once we know how to establish a communication budget, in the next class, we will decide on the media mix. We will learn about the characteristics of the different media and what factors to consider in developing the mix. [MUSIC]
