Kenny McKinney wants to get more customers into his new Paintball City store. Kenny is new at owning a business and has to decide how much to spend on his marketing communications efforts (he calls everything advertising because he never had a marketing class, which is fairly common among highly successful entrepreneurs). There are four ways Kenny can use to decide how much to budget for marketing Paintball City: the affordable method; the percentage of sales method; the competitive parity method; or the objective and task method. Recommend one and explain why it is the best approach. Chapter 15.
In my experience, the best way to set a marketing budget is to set it blindly, larger than you think you need it to be, and then find your justifications.
The authors of our textbook throw my vast experience out the door, and instead try to find an objective sort of way to instead set this budget. Kenny’s got a new business, so he has to use his marketing budget to drive sales. It is no longer the day when you could throw out your shingle, saying “Ye Olde Paintball City Store” and all the locals would have to come to your shop for their paintball needs because you were the only game in town.
I’m not sure what Kenny’s approach here is, but my inquisitor knows the four basic ways to set the marketing budget. First is the affordable method, where you set it at what you think you can afford. Second is the percentage of sales method, where you take the sales, and then pull out a set percentage of those and there’s your marketing budget. Third is the competitive parity method, where you look at the budget your competitors set and you match that. Finally you have the objective and task method, where you take the goals you have, what you need to do to meet them, and look at the cost of those.
All of these have their weaknesses for Kenny. For the affordable method, Kenny is just starting out, so he may feel like he doesn’t have any money right now after he clears his set-up and inventory and licensing. It is also cyclical. When you feel poor, you don’t want to spend money on anything extraneous, and that reinforces your poverty. A good marketing plan can fight against that cyclical issue. The percentage of sales approach has the same weakness. When your sales drop, math says that the dollar amount of the percentage you’re taking will also drop. There is a secondary concern where this is a new store and Kenny has no sales. No matter what percentage he took now, the amount of dollars he would be able to take out is ZERO. The issue with the third possibility, the competitive parity method is that many of his competitors are established businesses. Their markets may be somewhat different. It would also be hard to find that information if the companies were closely held. And finally, the problem with the objective and task is that Kenny doesn’t know what he’s doing. He doesn’t have much marketing background, so he would be limited on the tasks he knew how to do (and what tasks would be beneficial and when they would be most beneficial).
So though each have their issues, I think the one that Kenny should chose is the last one. Instead of making a budget of some set amount and then trying to find marketing tasks to fit that budget, he can work the other way around. He can consult with someone who has the experience of what to do when and knows how much they cost -- and then he can measure them to see how well they do. Though this is more or less zero-based-budgeting (a scare word there) for marketing, as Kenny’s business matures, he can find what works and doesn’t work for his business. For the time being, the marketing tasks need to be planned, individually budgeted, and measurable.