Question

Discuss the percentage of sales and competitive parity methods for setting advertising budgets. What are the shortcomings of both these methods?

Answer 1

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The percentage-of-sale method is used in setting advertising budgets on the basis of the percentage of sales which has been done in the past or forecast future sales. This type of advertising budget method is quite common because it gives the idea by comparing the allocation of resources and the expenditure of past sales. Management or assigned department tries to figure out the percentage based on the company's previous budget history.

Shortcomings of the percentage of sales method are that it doesn't focuses on or recognizes the changes in conditions and how will the sales effect if certain changes are not made. Also, adopting this method may also lead to excessive spending on large brands and a reduction in the budgeting of products.

The competitive parity method determines the advertising budget by deciding how much dollars needed to be spent according to the competitive spending the dollars. Thus, it is assumed that the person or the employee who decides the budget always functions the advertisement on the basis of other companies' past records.

The shortcoming of the competitive parity method is that there are full chances that the company will face the mistakes exactly what competitor is likely to make because budgeting is dependent on competitors' objective. Also, this budgeting method automatically assumes that competitors' objective and budgeting techniques are the same as according to their own company.