Manag., July-2018 – Q6
0. The firm may go for defensive advertising as per which one of the following approaches?
- Option : C
- Explanation : The following points highlight the top five methods of determining an advertising budget listed by Joel Dean. The methods are:
(i) The Percentage of Sales Approach: In this method, the sales value of the preceding year is first taken and then the expected sales during the year in question are arrived at. Thereafter, some percentage of the expected sales is considered and this is known as the percentage of sales approach. This method was dominant in the past and even now it is widely used. It may be a fixed percentage or a percentage that varies with conditions of sales. The method is simple in calculation. In this method, a clear relationship exists between sales and advertising expenses. By adopting this method advertisement war can be avoided. It leads to a budget set by the availability of funds rather than by market opportunities.
(ii) The All-You-Can Afford Approach: Under this approach, a company spends as much on advertising as it can afford. From the name itself, it is clear that the affordable amount set aside for advertising is known as affordable method. This approach appears to be more realistic, for all companies generally spend that much amount on advertisements which they can afford, even though they may not say so.
(iii) The Return on Investment Approach: This approach treats advertisement as a capital investment rather than as a more current expenditure. Advertising has a two-fold effect, (a) It increases current sales: An increase in current sales involves such decisions as the selection of the optimum rate of output in order tomaximise short run profits. (b) It builds up future goodwill: The building up of goodwill for the future calls for a selection of the pattern of investment which is expected to produce the best scale of production, leading to the maximum long-run profits.
This method emphasizes the relationship between advertisement and sales. Sales are measured with advertising and without advertising. The rate of return provides a basis for advertising budgeting, as the available funds will have to be distributed among various kinds of internal investment on the basis of the prospective rate of return.
(iv) The Objective and Task Approach: This method is also known as the research objective method. This method calls upon marketers to develop their promotion budgets by defining their specific objectives, determining the tasks that must be performed to achieve these objectives and estimating the cost of performing these tasks. The sum of these costs in the proposed budget. This approach is an improvement over the percentage of sales approach. But the fundamental relationship between the objectives and the advertising media again depends upon the past experience of the firm. In reality, tasks to be determined should be related to the objectives of the firm and to the past records of the firm.
(v) The Competitive Parity Approach: This approach is nothing but a variant of the percentage of sales approach. A firm sets its budget solely depending upon the basis of competitors' expenditure. The advertising cost is decided on the basis of spending for advertising by the competitors in the same industry.
Two arguments are advanced for this method. One is that the competitors’ expenditures represent the collective wisdom of the industry. The other is that it maintains a competitive parity which helps to prevent or defend or safeguard promotion wars.
