“LENOV” is a famous brand in the field of home appliances of Pakistan. It is considered to be number one brand for the past 20 years in term of its market share and innovation. It’s product varieties ranges from refrigerators, freezers, air conditioners and microwave ovens. With a strong R& D department in place, it is continuously striving to bring product innovation. It has recently launched a new washing machine to enhance its product category having unique technology that sterilize, kill bacteria and remove odour from products like cushions, school bags, gloves, leather jackets, hand bags. It was extensively promoting its products using both electronic and print media. Its outdoor advertising and TVC are considered to be one of its own kinds. It was using percentage of sales method for deciding the advertising campaign budget in the previous years. This year the competition in the field of home appliances has intensified and is getting fierce day by day, making it tough for LENOV to stay at the top. LENOV is very hopeful to beat all the odds with the new invention and addition of washing machine in its product range. The marketing team of LENOV is busy in media planning. They want to decide about the advertising campaign budget for the current year.
· Considering the overall situation of the company, suggest which method of determining the advertising budget, other than percentage of sales method, the company should use this year and why? Give four logical reasons to support your answer.
Methods of Establishing a Budget
Each of the various ways in which to establish an advertising budget has its pros and cons. No
method is perfect for all types of businesses, nor for that matter is any combination of methods.
Here, concepts from several traditional methods of budgeting have been combined into three
basic methods: percentage of sales or profits; unit of sales; and objective and task. You will need
to use judgment and caution in choosing your method or methods.
Percentage of Sales or Profits
The most widely used method of establishing an advertising budget is to base it on a percentage
of sales. Advertising is as much a business expense as the cost of labor and should be related to
the quantity of goods sold.
The percentage-of-sales method avoids some of the problems that result from using profits as a
base. For instance, if profits in a period are low, it might not be the fault of sale or advertising. But
if you stick with the same percentage figure, you will automatically reduce your advertising
allotment. There’s no way around it: two percent of $10 000 is less than two percent of $15 000.
Such a cut in the advertising budget, if profits are down for other reasons, may very well lead to
further losses in sales and profits. This in turn will lead to further reductions in advertising
investment, and so on.
In the short run a small business owner might make small additions to profit by cutting advertising
expenses, but such a policy could lead to a long term deterioration of the bottom line. By using
the percentage-of-sales method, you keep your advertising in a consistent relation to your sales
volume – which is what your advertising should be primarily affecting. Gross margin, especially
over the long run, should also show an increase, of course, if your advertising outlays are being
How to Allocate Your Budget
Once you have determined your advertising budget, you must decide how you will allocate your
First, you will have to decide if you’ll do any institutional advertising or only promotional
After you have set aside an amount on which to build your image (if that is your plan for the year),
you can then allocate your promotional advertising in a number of ways. Among the most
common breakdowns are:
The most common method of allocating advertising dollars is “percent of sales”. The departments
or product categories with the greatest sales volume receive the biggest share of the budget.
In a small business or when the merchandise range is limited, the same percentage can be used
throughout. Otherwise, a good rule is to use the average industry figure for each product.
By breaking down the budget by departments or products, the goods that require more promotion
to stimulate sales can get the required advertising dollars. Your budget can be further divided into
individual merchandise lines.
Your total budget may be the result of integrated departmental or product budgets. If your
business has set an upper limit for advertising expense percentage, then your departmental
budgets, which are based on different percentages of sales in each area, might be pared down.
In smaller businesses the total budget may be the only one established. It, too, should be divided
into merchandise classifications for scheduling.
Most executives of small businesses usually plan their advertising on a monthly or weekly basis.
Your budget, even if it is for a longer planning period, should also be calculated for these shorter
periods. It will give you better control.
The percentage-of-sales methods is also useful here to determine how much money to allocate
by time periods. The standard practice is to match sales with advertising dollars. Thus, if
February accounts for 5 percent of your sales, you might give it 5 percent of your budget.
Sometimes you might want to adjust advertising allocations downward in some of your heavier
sales months, so you can boost the budget of some of your poorer periods. But this should be
done only if you have reason (as when you competition’s sales trends differ markedly from yours)
to believe that a change in your advertising timing could improve slow sales.
The amount of advertising that you place in each advertising medium – direct mail, newspapers,
radio, etc. – should be determined by past experience, industry practice, and ideas from media
specialists. Normally it is wise to use the same sort of media your competitors use. That is most
likely where your potential customers look and listen.
You can either spend your advertising dollars in areas where your customers already frequent, or
you can use them to stimulate new sales areas. Whatever you choose, remember that it is
usually more costly to develop new markets than it is to maintain the ones that are already
· Criticize the old budgeting method that the company was using by highlighting why it is not applicable in the current situation.
While newer marketing methods do work and can increase a company’s client base, completely replacing traditional marketing with the latest marketing techniques can prove dangerous. Traditional methods have a high success rate and are proven. Internet methods are subject to clients or customers having access to an online medium and being Internet savvy. With traditional marketing, anyone with a newspaper, mail service, television or radio can learn of your business or service. Rather than customers going online to find your business or service (and possibly stumbling on your competitor’s website), you bring your business or service to potential customers with print advertisements and other traditional methods.DOWNLOAD SOLUTION HERE