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5. ResearchResearch can help you find the optimum price for your products. Generally, the optimum price is one that your customers are willing to pay, without it affecting your profits. This isn't a one-off activity, you must monitor your key pricing influences regularly as part of your overall market research to ensure your prices stay competitive and you still meet your customers' expectations. Market testingTo help you determine how much your customers are willing to pay for your product or service you should perform some form of market testing. As a start, research your customer's purchasing behaviour such as:
With this customer information in mind, you can then develop a price comparison offering a number of different product or service options for testing to help you determine a price range that is acceptable. CompetitorsYou should have already determined who your direct competitors are and how your business compares to them when you developed your marketing plan. This information can be useful to help you determine your price point. If you decide to use your competitors' prices as a guide, be careful that it doesn't dictate your prices too much, as it can seriously undervalue your product or service and drive down your profits. When you compare your business to competitors, it's also important to ensure you look at the business as a whole and compare on other value-based traits (such as special features, quality and customer service) as well as price. InfluencesPricing influences are external factors that can impact the price of products. Four influences that you may encounter include:
Price sensitivityPrice sensitivity refers to price fluctuations as customer demand increases and decreases. For example, commodity goods such as petrol have high price sensitivity. The difference of a few cents in price can impact a customer’s behaviour. Some markets are more sensitive to price increases than others. Price sensitivity can change over time based on a number of factors including changes in the economic environment, competition or demand. Factors other than price, such as quality, service, and uniqueness, can also influence price sensitivity. Level of demandProduct and service demand can influence your prices. If there is high demand, it is likely you can increase your price. Price can also influence demand. For example, if the price lowers, then demand can temporarily increase. Level of competitionCompetition can also influence your product’s or service’s price. In general, the less competition you have, the more demand there is for your product. If a new competitor enters the market, the competitor can affect your price. Government regulationsGovernment regulation can influence your pricing decision, as additional fees or levies may increase the sale price of your product or service. We are discussing here 2 approaches to budgeting. They have their advantage and disadvantage. (i) Top-Down Approach It is called top-down approach because the budgets are made by the top executed and then the money is passed down the line to various departments. This approach is applied in affordable method percentage of sales, competitive parity method and Return On
Investments (ROI) method of budgeting. (ii) Bottom-up Budgeting In this method promotion adjectives are set for the tasks to be performed. All the necessary activities to achieve the objectives are planned. The cost of these activities are as certained and budgeted. The total promotion budget is then approved by top management. This is also know as the build-up approach of budgeting.  “Money is the backbone of all organization. Your budget should be in accordance with your objectives and the chosen Media” Competitive Parity MethodMany firms base their advertising expenditure to compete with their rivals or their competitors.The information regarding this is found in business magazines, journals and annual reports of the company. They not only try to have the same expenditure but also try to choose the media accordingly. They also choose the media vehicle and the frequency of advertisement to match with that of the competitor. Firms believe that by following this method they can make the optimal expenditure to lead to stability in market place etc. This method may ignore the objectives of the company and concentrate only on competitive advertising. It may also ignore the other aspects like creativity and the role of media. The effect of expenditure is known after the advertisement has been released, and one does notknow the next move of the competitor for expenses on the advertisement and promotion. Some companies use the comparative method in conjunction with other methods as well. It would however be more appropriate to keep in mind the objective of the firm before going in for this method. Affordable Method This simply means what the firm can afford after meeting all their expenses. The firm allocates the amounts to be spent on production and after that allocation is done for advertising and promotion. The tasks to be performed by advertising is not considered. In this method there can be chances of overspending or understanding. This approach is common in small firms and some big firms not having much knowledge of advertisement resort to this methodas well. In this method it is difficult to get into financial problem as we are spending only what we can afford. In this method it is difficult to assess whether the advertising expenditure madeis optimal and will give proper results. Advertising expenditure must lead to sales. In this connection we have to refer to the S-shaped response model, which is dealt earlier. A Fixed Percentage of Turnover Method This method is most common used in small and medium-sized companies. A percentage amount of the sales as decided is allocated for advertising expenditure. The percentage is based on lastyear’s sales. The sales can be projected for next year and percentage expenses incurred accordingly. The advertising expenses can be calculated on straight percentage sales or on the percentage of unit cost. Objective and Task Method The expenditure allotted depends on the functions to be performed to achieve the objectives of the organization. In this method objective are defined and the specific strategies are formulated to achieve them. Then the cost of implementing these strategies is estimated. Establishing of objective may be interpreted as achieving a percentage market share and bring awareness of the brand to the consumers and general public. The strategies may include advertising in various media, and other elements of promotion mix. Then the cost ofvarious media chosen is estimated. It is also necessary to monitor the expenses and evaluatethe results. It is difficult to correlate the expenses with the task performed for this experience is required. Other methods consist of regression analysis, adaptive control model and compromise method given earlier. Post navigationWhat is the best approach for determining a promotion budget?The simplest method for determining the promotion budget is often merely using a percentage of last year's sales or the projected sales for the next year. This method does not take into account any changes in the market or unexpected circumstances.
What are the four methods to set the promotion budget?How does a company decide on its promotion budget? We look at four common methods used to set the total budget for advertising: the affordable method, the percentage-of-sales method, the competitive-parity method, and the objective-and-task method.
Which method of promotional budgeting is most commonly used by marketers?Percentage Method
This approach is the most common for organizations. This method involves setting a budget by percentage of sales, sales goals or gross markup. The percentage used can be derived from your company's past performance and/or industry standards.
Which budgeting method sets the promotion budget to match competitors outlays?Competitive-parity method is a method that refers to set their promotion budgets to match competitors' outlays. They monitor competitors' advertising or get industry promotion spending estimated from publications or trade associations and then set their budgets based on the industry average.
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In which approach to budgeting do firms set their promotion budget based on what they believe they can afford?
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