Financing advertising and promotions - Sales Management

Advertising reserves

There are two main ways to generate the funds needed for advertising and promotional (typically abbreviated to A & P) support:

  1. making an advertising reserves provision within product costing's and including this within the supplier’s price, or
  2. making a levy on distributors.

As it is not normally practical to make a levy on distributors, unless they have a tied contract such as franchisees, or are exclusive distributors in a foreign market, the nor malpractice is to build a reserve into costing's,depending on the level of advertising and promotion support planned.

The level of the advertising reserve need not be the same for all products, although many companies do just include a standard percentage in the price. There are options,including the following.

  • The advertising reserve could be accrued by a variable margin relating to the profitability of products, in which case there could be a cross subsidy from more to less profitable products (such as from established to recently launched products).\
  • Each product might be coasted to provide the advertising reserves needed for its support and development. This could be problematic in that if higher levels of promotional support were needed for product, that product might not support high enough price to generate sufficient promotional funds at certain stages of its life cycle (i.e. in the post-launch investment stages).

Some of the products in your portfolio may develop well with minimal advertising and promotional support, others may need considerable support in the early stages. Highly branded consumer products tend to require greater advertising and promotional support, anything from around three per cent of turnover for mass market products, to 30 percent of sales revenue for luxury speciality high -margin products (e.g. perfumes historically have large advertising and promotion budgets as a percentage of turnover).

Most suppliers of industrial products reserve very limited funds, often under five per cent, for advertising and promotion support. But service providers typically have significant advertising and promotion activity in their competitive markets. A fundamental concept in marketing is to push your strengths. That may be liberally interpreted as placing emphasis on the market sectors and products with the most potential,where potential may be measured in such terms as:

  • consumer incomes and spending power(or user budgets, for industrial and business-to-business products)
  • population size and growth
  • assessments of market sophistication in matters of distribution or consumption
  • cultural acceptance of your products (the market possibly already being developed through competitors’ activities)
  • freedom from regulatory controls.

Where there are clear risks to your market development programme, such as unstable political environments, arbitrary changes in regulations, or where you can clearly see that developing a consumer franchise is a major long-term project, then, although you perhaps should not abandon the market, you might be wise to allocate very limited promotional funds in the initial stages.

As the timing of promotional expenditures may not be directly related to when the funds are earned from product sales, a system should be agreed with the company accountants whereby accruals for advertising and promotions are noted separately in the accounts as a reserve and not allocated back to profit if not dispersed in the same period as the accrual is earned.

Spend in the marketing mix

In deciding how to spend an advertising and promotion budget consideration must be given to:

  • target market and segmentation factors
  • product positioning in the portfolio
  • weighting of budget supporting the brand
  • level of spend.

The marketer with a varied product portfolio needs to:

  • clarify the specific target segments (e.g.size and geographical spread)
  • identify the range of media and types of promotions likely to reach and appeal to the specific target groups
  • cost each alternative likely to achieve the desired level of exposure
  • take decisions on the levels of budget allocated to each product variant to enable sales and marketing objectives to be achieved.

Within any product portfolio the available budget for advertising and promotional activity can be weighted in several ways,including:

  • by product profit management priority (an attacking marketing strategy might aim to build products with growth potential to build profitable sales while holding competitive edge, such as technology,distribution, acceptance, etc.)
  • by current sales volumes or assessed sales potential (i.e. sales targets)
  • by prioritizing products under particular competitive threat (defensive strategies)
  • by weighting budgets taking account of shorter-term strategic or tactical problems(i.e. putting additional budgets behind product with distribution weaknesses).

The budget level will be a limiting factor in selecting media or promotional formats. Both consumer and industrial products require appropriate promotional support. Specific objectives, as well as budget levels, will have bearing on the allocation of budgets between alternative forms of advertising and promotion support (see Figure ).

  • If your products have a narrow market appeal or target market, but high A & Budgets, then a commonly favored is targeted sponsorships (i.e. events favored by the target market, such as sports or cultural events – but be wary of the chairman who wants the sponsorship funds to go to his favorite area, if that will not reach your target market) and brands publicity activity.
  • If you have limited A & P funds and an arrow target market, lower cost promotional activities can include personal promotion through selling and direct, advertising in specialist journals reaching the target group, point of sale material, special event promotion or sponsorship, etc.
  • If you have mass market products with broad user/consumer appeal and generate large budgets, mass media maybe the route for you – media advertising,television, radio, mass circulation newspapers and magazines, and even product placement in major television programmes as a brands publicity exercise.
  • And, finally, if your products have a broad appeal, but budgets generated are initially low, then posters in many markets can Beverly effective, as can limited media communications such as cinema advertising (if your target group includes the profiles of typical cinema goers).

The manager responsible for spending advertising and promotional budgets is going to be concerned with value for money. Some guidelines for selecting media are shown in the following table.


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