Monthly Archives: June 2012

Budget Revenue Basis

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Which Sales Method for establishing your budget revenue basis?

Your budget revenue basis can be determined as a percentage of past sales, of estimated future sales, or as a combination of the two:

 1. Past Sales. Your base can be last year’s sales or an average of a number of years in the immediate past. Consider, though, that changes in economic conditions can make your figure too high or too low.

 2. Estimated future sales. You can calculate your advertising budget as a percentage of your anticipated sales for next year. The most common pitfall of this method is an optimistic assumption that your business will continue to grow. You must keep general business trends always in mind, especially if there’s the chance of a slump, and hardheadedly assess the directions in your industry and your own operation.

 3. Past sales and estimated future sales. The middle ground between an often conservative appraisal based on last year’s sales and a usually too optimistic assessment of next years is to combine both. It’s a more realistic method during periods of changed economic conditions. It allows you to analyze trends and results thoughtfully and to predict with a little more assurance of accuracy.

 Unit of Sales

In the unit-of-sale method you set aside a fixed sum for each unit of product to be sold, based on your experience and trade knowledge of how much advertising it takes to sell each unit. That is, if it takes two cents’ worth of advertising to sell a case of canned vegetables and you want to move 100,000 cases, you’ll probably plan to spend $2,000 on advertising them. Does it cost X dollars to sell a refrigerator? Then you’ll probably have to budget 1,000 time X if you plan to sell a thousand refrigerators. You’re simply basing your budget on unit of sale rather than dollar amounts of sales.

 Some people consider this method just a variation of percentage-of-sales. Unit-of-sales does, however, probably let you make a closer estimate of what you should plan to spend for maximum effect, since it’s based on what experience tells you it takes to sell an actual unit, rather than an overall percentage of your gross sales estimate.

 The unit-of-sales method is particularly useful in fields where the amount of product available is limited by outside factors, such as the weather’s effect on crops. If that’s the situation for your business, you first estimate how many units or cases will be available to you. Then, you advertise only as much as experience tells you it takes to sell them. Thus, if you have a pretty good idea ahead of time how many units will be available, you should have minimal waste in your advertising costs.

 This method is also suited for specialty goods, such as washing machines and automobiles; however, it’s difficult to apply when you have many different kinds of products to advertise and must divide your advertising among these products. The unit-of-sales method is not very useful in sporadic or irregular markets or for style merchandise.

Methods of Establishing An Advertising Budget

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Methods of Establishing An Advertising Budget

Each of the various ways in which to establish an advertising budget has its problems as well as its benefits. No method is perfect for all types of businesses, nor for that matter is any combination of methods. All Methods of Establishing An Advertising Budget require consistant overview and revision.

 Here concepts from several traditional methods of budgeting have been combined into three basic methods:

 

(1) Percentage of sales or profits

(2) Unit of sales

(3) Objective and task

 

You’ll need to use judgment and caution in settling on any method or methods.

 

Percentage of Sales or Profits

The most widely used method of establishing an advertising budget is to base it on a percentage of sales. Advertising is as much a business expense as, say, the cost of labor and, thus, should be related to the quantity of goods sold.

 

The percentage-of-sales method avoids some of the problems that result from using profits as a base. For instance, if profits in a period are low, it might not be the fault of sales or advertising. But if you stick with the same percentage figure, you’ll automatically reduce your advertising allotment. There’s no way around it: 2% of $10,000 is less than 2% of $15,000. Such a cut in the advertising budget, if profits are down for other reason, may very well lead to further losses in sales and profits. This in turn will lead to further reductions in advertising investment, and so on.

 

In the short run a business owner might make small additions to profit by cutting advertising expenses, but such a policy could lead to a long term deterioration of the bottom line. By using the percentage-of-sales method, you keep your advertising in a consistent relation to your sales volume – which is what your advertising should be primarily affecting. Gross margin, especially over the long run, should also show an increase, of course, if your advertising outlays are being properly applied.

 

What percentage?

You can guide your choice of a percentage-of-sales figure by finding out what other businesses in your line are doing. These percentages are fairly consistent within a given category of business.

 

It’s fairly easy to find out this ratio of advertising expense to sales in your line. Check trade magazines and association. You can also find these percentages in Census and Internal Revenue Service reports and in reports published by financial institution such as Dun & Bradstreet, the Robert Morris Associates, and the Accounting Corporation ofAmerica.

 

Knowing what the ratio for your industry is will help to assure you that you will be spending proportionately as much or more than your competitors; but remember these industry averages are not gospel. Your particular situation may dictate that you want to advertise more than or less than your competition. Average may not be good enough for you. You may want to out-advertise your competitors and be willing to cut into short term profits to do so. Growth takes investment.

 No business owner should let any method bind him or her. It’s helpful to use the percentage-of-sales method because it’s quick and easy. It ensures that your advertising budget isn’t way out of proportion for your business. It’s a sound method for stable markets. But if you want to expand your market share, you’ll probably need to use a larger percentage of sales than the industry average.

Benefit approach To Marketing

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Benefit Approach To Marketing – Regardless of your media, to make your marketing concept work in advertising messages you must analyze each product and service in relation to these two elements:

 Product point – Those features built into the product or service. Product points are usually highly touted in advertising messages, but they are relatively ineffective unless they are integrated with the second ingredient.

 

Benefit – The advantage a customer receives after purchasing the product. Your advertising should promise benefits and make those promises believable by naming the product points that will produce the benefits. For example, “You’ll feel better about your family’s safety (benefit) when they are riding on the new steel-belted radials from Armstrong-thanks to the interwoven blankets of steel embedded deep in the tread (product point).”

 

Media – Consider many types of media in your promotional campaigns.

  • Internet
  • Newspapers
  • Shoppers
  • Television
  • Radio
  • Billboards
  • Direct Mail
  • Magazines

 

In summary, the importance of promotion in the overall marketing strategy suggests you devote time to its written plan and constantly monitor the plan’s performance. Be creative but avoid cuteness. Stick to the benefit approach, and your customers will respond.

 

Persuasion

Your business’s success will depend on your ability to persuade others to take actions that will help them while also helping you. This is referred to as a win-win situation. Both parties in the transaction must receive a benefit in value or in satisfaction.

 

The key to successful selling is to determine which motives brought the customer to you and then develop a sales presentation that will convince the customer that you and your product can meet those needs. This process can be broken down into a series of steps:

 

Prospecting – This is the activity of identifying potential customers or running ads to entice people into your store.

 

Pre-approach – This includes planning what you will say to customers and what evidence or displays you will need to enhance your presentation.

 

Approach – This may include a greeting, statement of objective or series of questions to determine exactly what the customer wants. Learn as much as possible about the customer and his or her buying motive before you begin your presentation.

 

Presentation – This is the opportunity to tell customers everything they need to know to make an intelligent buying decision.

 

Dramatization – Show enthusiasm for your product or service.

 

Proof – Words may not be enough. You may need to show facts and figures, endorsements, testimonials or other means of backing up your claims.

 

Visualization – Help your customers visualize the satisfaction they will derive from buying now.

 

Demonstration – If possible, let the customer experience the product. Many items are difficult to sell without a test drive.

 

Trial close – This is a statement or question designed to let you know how close the customer is to making a buying decision.

 

Uncover objections – Find out why the customer is not ready to buy.

 

Meet objections – Go back over your presentation to clear up misunderstandings or doubts the customer may have.

 

Final close – Ask a question that causes the customer to make a buying decision in your favor.

 

Follow-up – This includes all the steps you take to write up the sale, arrange delivery, receive payment and ensure customer satisfaction.

 

The above process may be inefficient in many selling situations. The genius and creativity of advertising is its flexibility in preconditioning the customer and answering some objections. Certainly your reputation, attitude and the atmosphere of the selling situation can do much to alleviate fears or concerns in the mind of the customer. Your best prospect often is a satisfied customer or the friend or relative of a satisfied customer.

 For many products or services, direct mail and telephone selling can be used to complete the sale or to qualify prospects for a personal follow-up.

 Motivation is an essential ingredient in persuasion. You and your employees must maintain a positive mental attitude. You must learn to sell yourself, your company and your product. And your attitude must be one of serving the customer first, with the realization that your success depends completely on your ability to serve the customer.

Promotion

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Promotion

Perhaps the most versatile of the five marketing Ps is promotion. It covers all phases of communication between the seller and the potential customer. It is versatile because a change in budget, media or target audience can be made quickly. Promotions also can be effectively changed for specific market segment efforts. Major promotional concerns include the following.

 Budget

Because promotional costs can originate from several sources, it is vital to establish a written budget and closely monitor actual costs. The budgeting procedure is simplified if separate budgets are prepared for advertising and promotional activities. Sales goals in dollars, units or both are usually the basis for promotional budgets.

 

Timing

Selling when the consumer wants to buy is a fundamental factor in the marketing concept. Promotional efforts, whether in-store or through mass media advertising, should be timed to coincide with maximum seasonal or cyclical demand.

 

Distribution of Promotional Efforts

Advertising – The major portion of a firm’s promotional budget is advertising. Some advertising media, such as the Yellow Pages, where a specific amount is charged each month, can be budgeted as fixed advertising expenditures. The mass media-newspapers, radio, TV, direct mail and magazines-should be individually budgeted to achieve sales goals, improve your image and expand your customer base.

 

Promotion – Many firms classify promotion as a separate budget category. In this case, promotional efforts include in-store displays, sampling, specialty advertising, giveaways and other nontraditional media efforts.

 

Publicity – This is the no-cost element, meaning there is no charge by the newspaper or other medium for carrying a news release or feature. There will be an internal cost, however, for the preparation of publicity releases and photography. Many businesses miss publicity opportunities because they do not have a written marketing plan. Every promotion or addition of personnel is an opportunity for free publicity, but only if the news release is prepared and sent to the media. Business expansion, remodeling, automation or changes in product name all deserve a publicity program.

 

Promotion Strategy

All advertising and other promotional activities should be in tune with the firm’s stated position in the marketplace. This suggests that not only advertising themes but also media selection must be based on building and strengthening that position.

Factors Affecting Sales

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Factors Affecting Sales

After categories have been selected and current sales divided among them, the various factors that can affect sales in each category must be considered. The factors affecting sales could be either internal or external. Internal factors are those that you can influence. External factors are those that affect the market served by your business, but are generally beyond your control.

 

Internal Factors

The following are typical internal factors that could influence your sales forecast:

  • Promotional plans
  • Expansion plans
  • Capacity restrictions
  • New product introductions
  • Product cancellations
  • Sales force changes
  • Pricing policy
  • Profit expectations
  • Market expansion to new customers or territories

 External Factors

Among the external factors that must be considered are the following:

  •  Business trends
  • Government policies
  • Inflation
  • Changes in population characteristics
  • Economic fortunes of customers
  • Changes in buying habits
  • Competitive pressures

Creating a Marketing Budget

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Creating a Marketing Budget

 Resource allocation is a critical part of any marketing plan. To simplify Creating a Marketing Budget, it is recommended that investment in labor, material and services be broken down into the five Ps of marketing:

 Product – The item or service you have to sell.

 Price – The amount of money you ask your customer to pay for your product.

 Place – Where a product is now and how it is transported to your customer.

 Promotion – The advertising and publicity necessary to complete a transaction.

 Persuasion – Personal selling of your business.

 Each of the five Ps represents an investment in money, materials and services. We can represent this as a system of pipes consisting of a tank of money, which represents the total marketing budget, a main pipe through which the dollars flow and five valves that control the flow of money to each of the five Ps. The concepts of market planning, segmentation and positioning are shown as filters. Budgeting is the process of setting the valves to meet the needs of each marketing task for each segment and then monitoring the results over time to make sure you remain on target.

 As your market segments change, you will have to reset the valves. The important thing is to have in place an effective marketing research system that gives you the confidence to move in the right direction for the right reason.

Understanding Financial Analysis

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Understanding Financial Analysis

Efforts at Understanding Financial Analysis can lead to conflicting conclusions derived from identical facts. Comparing gross profit with the industry average could raise questions.

 If the company were more competitive in its pricing, could it capture a larger market share? A reasonable answer to this question would depend upon thorough knowledge of their operations and the experience of their sales personnel in dealing with specific customers.

 On the other hand, if their gross profit percentage is below that of the industry, a number of other questions would be raised, such as the following:

  • Are they purchasing at prices that are too high to provide an adequate gross profit?
  • Is their pricing structure so low that adequate gross profit margins cannot be attained?
  •  Are salesmen too quick to cut prices?
  •  Is their marketing effort too heavily concentrated in those product lines that offer a relatively low gross profit percentage?
  •  Is their marketing effort directed toward those high-volume accounts that are so highly competitive that gross profit must be trimmed to an unrealistically low level?