A Typology of Methods for Setting Promotion Budgets And The Great New Debate! Ted Mitchell

Three Major Approaches Cost-Based Methods – (AKA Forecasted Sales Methods) Competitive-Based Methods – (AKA Market Share methods) Customer-Based Methods – (AKA Demand-Based Methods)

3 Layers of Promotion Budget 1) Head Office Strategic Task of Allocating Corporate Budget to SBUs/Markets 2) SBU Strategic Tasks of – a) Choosing the Budget for the Period – b) Making Incremental Changes 3) SBU Tactical Tasks of Allocating SBU Budget between the Push and the Pull, choosing among the media, etc

Two Types of Budget Problems 1) Head Office Strategic Task of Allocating Corporate Budget to SBUs/Markets 2) SBU Strategic Tasks of – a) Choosing the Budget for the Period – b) Making Incremental Changes 3) SBU Tactical Tasks of Allocating SBU Budget between the Push and the Pull, choosing among the media, etc

Two Types of Budget Problems 1) SBU Strategic Tasks of – a) Choosing the Budget for the Period – b) Making Incremental Changes 2) Allocating Budget at the Business Level and the Corporate level

Two Business Level or SBU Type Applications 1) Setting the total promotion budget for a planning period or for a specific project or task 2) Making Incremental Changes to an existing budget for improving performance

SBU Strategic Layer Total Budget for a period or project Incremental Change Cost-Based 1) Affordable 2) Percentage of Sales 3) Profit Return (MROI) 1) Revenue Return Plus Breakeven Competitive- Based 1) Competitive Parity 2) Relative Mix Customer- Based 1) Objective-Task 2)Optimal Demand 1) Elasticity of Promotion Plus Breakeven 2) Elasticity of MROI

Budget Allocation Problems Strategic and Tactical levels Using ‘Return on Investment’ as the metric for giving more to one and less to another SBU A versus SBU B Brand A versus Brand B Push Plan A versus Pull Plan B Direct mail plan A versus Direct mail plan B The Winner is the one with the Highest Return on Investment

Strategic and Tactical Problems of Budget Allocation Using ‘Return on Investment’ First constraint is The budget limit or cut-off “We have a maximum budget of $490,000” Second Constraint is The investment opportunities are lumpy and finite “We have to choose between Plan A and B”

The NO Problem Decision Allocating Budget Between Programs or Plans Direct Mail 1 Direct mail 2Incremental Sales, Q 5,4678,0003,000 Profit per sale, $75 $75 Gross profit, G $410,000$600,000$225,000 Promotion cost, T $290,000$490,000$200,000 Net profit, Z $120,000$110,000$25,000 MROI = Z/T 41.4%22.4%12.5% ROI cutoff of 20%

The NO Problem Decision Allocating Budget Between Programs or Plans Direct Mail 1 Direct mail 2Incremental Sales, Q 5,4678,0003,000 Profit per sale, $75 $75 Gross profit, G $410,000$600,000$225,000 Promotion cost, T $290,000$490,000$200,000 Net profit, Z $120,000$110,000$25,000 MROI = Z/T 41.4%22.4%12.5% ROI cutoff of 20%

SBU Problem of Allocating Budget Between Programs or Plans Direct Mail 1 Direct mail 2Incremental Sales, Q 5,0008,0003,000 Profit per sale, $75 $75 Gross profit, G $375,000$600,000$225,000 Promotion cost, T $290,000$490,000$200,000 Net profit, Z $85,000$110,000$25,000 MROI = Z/T 29.3%22.4%12.5% ROI cutoff of 20%

SBU Problem of Allocating Budget Between Programs or Plans Direct Mail 1 Direct mail 2Incremental Sales, Q 5,0008,0003,000 Profit per sale, $75 $75 Gross profit, G $375,000$600,000$225,000 Promotion cost, T $290,000$490,000$200,000 Net profit, Z $85,000$110,000$25,000 MROI = Z/T 29.3%22.4%12.5% ROI cutoff of 20%

SBU Problem of Allocating Budget Between Programs or Plans Direct Mail 1 Direct mail 2Incremental Sales, Q 5,0008,0003,000 Profit per sale, $75 $75 Gross profit, G $375,000$600,000$225,000 Promotion cost, T $290,000$490,000$200,000 Net profit, Z $85,000$110,000$25,000 MROI = Z/T 29.3%22.4%12.5% ROI cutoff of 20%

A 12% return on the additional $200,000 is below the cut-off of 20% Use the $200,000 in the bank and make an ROI of 20% which is $40,0000 Add it to the less profitable Direct mail and your profit goes to $120,000 for Direct #1

Direct Mail 1 plus bank Direct mail 2Incremental Sales, Q 5,0008,000+3,000 Profit per sale, $75 $75 Gross profit, G $375,000$600,000+$225,000 Promotion cost, T $290,000$490,000$200,000 Bank Investment $200,000$0-$200,000 Bank profit $40,0000-$40,000 Net profit, Z $125,000$110,000 MROI = Z/T24.5%22.4%

BUT!!!!! Doesn’t the Increase in Sales, Revenues, Market Share, Gross Profits count for anything

Direct Mail 1 plus bank Direct mail 2Incremental Sales, Q 5,0008,000+3,000 Profit per sale, $75 $75 Gross profit, G $375,000$600,000+$225,000 Promotion cost, T $290,000$490,000$200,000 Bank Investment $200,000$0-$200,000 Bank profit $40,0000-$40,000 Net profit, Z $125,000$110,000 MROI = Z/T24.5%22.4%

Welcome to the Debate! The Most Important Debate in The History of Marketing!