8.3.1 Budgeting¶
In this session, we discussed how to develop a communication strategy for promoting a product, including different approaches for budgeting. Let’s break down the key points discussed:
Budgeting for Promotion¶
There are several ways to establish a budget for your promotional efforts. While there is no single "right" method, the following are commonly used approaches:
1. Affordable Method¶
- This is the simplest approach where the company allocates whatever funds are left after other expenses toward promotion.
- Who uses it? Startups or businesses with limited resources may adopt this method as it helps keep costs under control.
- Drawback: It is not the ideal approach since it doesn’t strategically plan how much should be spent on promotion, leading to less efficient budgeting.
2. Percentage of Sales¶
- A more common approach where the promotion budget is calculated based on a percentage of sales revenue. For example, if you generate $100,000 in sales, you might allocate 5%, 10%, or 15% to your promotion.
- Who uses it? This is typically used by established firms with more predictable revenue streams. The percentage could vary based on business goals, market conditions, or industry standards.
3. Competitive Parity¶
- In this approach, you base your promotional budget on what your competitors are spending.
- Example: If your competitor spends 10% of their revenue on promotions, you would do the same to remain competitive.
- Who uses it? This is typically used by firms in competitive markets to ensure they don’t fall behind in their marketing efforts.
4. Objective and Task Method¶
- This method is more complex and strategic. It involves setting clear objectives (like gaining market share) and determining the tasks needed to achieve these objectives. The budget is then calculated based on these tasks.
- Steps involved:
- Market Share Goal: What is the desired market share?
- Audience Reach: How many people need to be reached to achieve this goal?
- Trial Rate: What percentage of those who see the promotion will try the product?
- Gross Rating Points (GRPs): The number of impressions needed to influence customers to try the product.
This method is detailed and involves creating a funnel to calculate the necessary advertising impressions and expected outcomes.
Example: Cloud Nine Sunburst Energy Drink¶
Here’s a simple example to explain how the objective and task method works:
- Objective: Cloud Nine wants to introduce a new energy drink, "Sunburst," targeting casual athletes. They estimate 50 million potential users in the market.
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Their target is to reach 8% of this market, i.e., 4 million users.
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Task: The company plans to reach 80% of the market (40 million impressions) with their advertising message. Of these, 25% will try the product, which means 10 million potential trials. Of these, 40% (4 million) will become loyal users, which is the company’s ultimate goal.
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Budget Calculation:
- To achieve these numbers, the company will need to buy 3,200 Gross Rating Points (GRPs).
- Each GRP costs $10,000, so the total budget for the first year of advertising is $32 million.
This method allows companies to align their promotional spending with specific goals and tasks, ensuring that the budget is spent efficiently to reach their objectives.
Communication Mix Characteristics¶
The communication mix includes different methods of promotion, each with its own characteristics and benefits. Here’s a summary:
1. Advertising¶
- Characteristics:
- Pervasive: Reaches a large audience.
- Amplified: Has a significant impact on the audience.
- Controlled: Allows companies to control their message and how it is presented.
- Ideal for: Broadly reaching large audiences and delivering consistent messaging.
2. Sales Promotion¶
- Characteristics:
- Draws attention and provides an incentive.
- Generates immediate responses and boosts sales in the short term.
- Ideal for: Short-term sales increases and customer engagement.
3. Public Relations (PR)¶
- Characteristics:
- High credibility: People tend to trust third-party endorsements and media coverage.
- Reaches hard-to-find buyers.
- Ideal for: Building trust with the audience and reaching niche markets.
4. Events and Experiences¶
- Characteristics:
- Engaging and relevant.
- Provides an immersive experience for the customer.
- Ideal for: Creating memorable brand experiences and reaching targeted audiences in specialized settings (e.g., trade shows, fairs).
5. Direct Marketing¶
- Characteristics:
- Customized and interactive communication.
- Timely and personalized.
- Ideal for: One-on-one communication and immediate response tracking.
6. Personal Selling¶
- Characteristics:
- Builds personal relationships.
- Allows for immediate feedback and adjustment of strategies.
- Ideal for: High-touch sales processes where personal interaction is crucial.
Developing an Ideal Communication Strategy¶
To develop an effective communication strategy, follow these steps:
- Understand the Communication Mix: Familiarize yourself with the different methods and their characteristics to determine the best channels for your product.
- Set Clear Objectives: What do you want to achieve with your communication efforts? Whether it's brand awareness, loyalty, or sales, having clear objectives is essential.
- Choose the Right Tactics: Based on your objectives, select the appropriate mix of advertising, sales promotions, public relations, etc.
- Allocate the Budget: Use one of the budget methods (affordable, percentage of sales, competitive parity, or objective and task) to determine how much money to allocate to your promotional activities.
- Monitor and Adjust: Track the effectiveness of your strategy and make adjustments as necessary to optimize your communication efforts.
In conclusion, developing an ideal communication strategy requires understanding your market, selecting the right promotional mix, and ensuring the budget is aligned with your objectives. By considering these elements, businesses can ensure their marketing efforts are effective, efficient, and aligned with their long-term goals.
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