Competitive parity method of advertising budget

Advertising appropriation—also referred to as an advertising budget—is the portion of a total marketing budget that a company allocates for advertising over a specific time. The advertising appropriation policy for a company may be based on any number of approaches.

For example, some companies will budget an amount for advertising that is a fixed percentage of sales. Other companies may base their ad spending on what the competition spends. Whatever method a company uses to determine its advertising appropriation, it must attempt to balance the money spent against the additional revenue the company actually achieves through its advertising efforts.

Advertising appropriation refers to the portion of the total marketing budget a company spends on advertising over a specific time.
Companies can use direct marketing methods to track the response rates of their advertising campaigns and help them pinpoint an optimal level for ad spending.
Companies can use a variety of methods for setting an advertising budget, such as the competitive parity method, the adaptive control method, and the percentage of sales method.
A company with a new product or service will generally need to spend more money on advertising in order to generate brand awareness.
In a very competitive marketplace, a company may need to increase its advertising appropriation in order to get the consumer's attention and stand out from the crowd.

In practice, it's not always easy for a company to determine the amount of money it should allocate for its advertising budget. This is because of the lack of a definite relationship, in many cases, between the amount spent on advertising and the company's sales and profitability. For this reason, many companies have opted for direct marketing, which allows them direct communication and distribution of their advertising to their target audience.

The U.S. Small Business Administration (SBA) recommends as a general rule that small businesses with $5 million or less in annual revenues should budget 7% to 8% of their revenues on marketing.

Rather than relying on a third party—such as mass media television or radio ads—direct marketers deliver their sales promotions through direct mail, email, social media, texting, and various other methods.

Direct marketing appeals to many companies because it is easier to track the response rate of their advertising campaigns and quickly see if the money spent on advertising results in growing sales and revenue. In turn, this information helps companies decide whether to increase or decrease advertising appropriation depending on the effectiveness of the marketing campaign.

While direct marketing data can help a company pinpoint the right amount to spend on advertising, this is most effective if the company has already run a campaign and generated sales results to analyze.

In cases in which a company has not yet run a direct marketing campaign or has decided against using direct marketing altogether, there are other methods it can use for determining an advertising budget.

This advertising budgeting method is based on what a company thinks it can afford to spend on marketing. Because it's not based on a specific goal or any underlying data, the affordable method can be unreliable, leading to too much or too little being spent relative to returns.

A company using an adaptive control method will use market research to estimate the sales volume and profitability based on different ad budgets. They will use test markets to compare advertising spending levels that are either higher or lower than the current spending level. The company then uses these results to adjust its advertising budget.

This method bases the advertising budget on what a company expects its competitors to spend. It operates under the assumption that competing firms have similar marketing goals and execute them rationally. Thus, if a rival is spending approximately 5% of net sales on advertising, the company will set its advertising budget to match its rival.

While it may be seemingly easy to execute this spending strategy, the downside is one of "the blind leading the blind." It assumes the competitor has engaged in some form of market research or analysis to achieve the optimal advertising budget, which may or may not be the case.

The return on investment (ROI) method is a strategy that devises a promotional budget by balancing the amount of advertising to the profits generated from advertising. To be successful, this method depends on the company's ability to correlate profits to specific advertising efforts.

The company can implement tracking methods (such as tracking codes) that will help it see which ad campaigns are the best at generating profits. The company can then appropriate more advertising funds to those efforts.

A company that uses the percentage of sales method dedicates a fixed percentage of past sales revenue to advertising. Small businesses often use this method because it is simple to implement. The business owner will decide on the fixed percentage (generally between 2% to 5% of the previous year's sales) and then allocate that amount to the advertising budget.

Another variation of this method is to use anticipated sales for the upcoming year. Mature companies that have years of data regarding profit trends will use anticipated sales as this allows them to adjust the percentage up or down depending on the most recent sales estimates.

A number of factors may influence how advertising appropriation is figured. For example, a product or company with a high market share may require a smaller advertising budget than an upstart competitor. Similarly, a new product requires higher spending to build brand awareness and buzz; a mature product may not.

A company may inadvertently reduce its advertising effectiveness if potential customers see too many ads for the same product or service. In this case, the company may decide to reduce ad runs. A company in a very competitive market may require more advertising and greater advertising appropriation to get the consumer's attention.

There are various types of strategies companies use to determine their budgeting for marketing and promotional activities. Today we will study about the definition of the Competitive parity after that we dive into the difference between competitive parity and competitive advantage then atlast we will discuss key advantages of competitive parity.

What is Competitive Parity?

It is a concept of strategy, where a company spend all the budget of marketing activities at par with our competitors or industry average. It doesn’t use competitive budgeting strategy to beat competitors. The allocation of funds on advertising and promotional activities will be totally similar to the competitors budgets. It is just done to defend the competitive position and to maintain the reputation of a brand by not spending much. That is why it is known as defensive budgeting.

This is done to achieve a decent position as compared to your competitors in the market. For example, Samsung and Apple If one brand establish itself in a particular technology, others will try to emulate the same strategy and try to allocate the budgets accordingly to make their presence in the same space.

What is Competitive Parity Budgeting Method?

In competitive parity method, we determine the advertising budget by analysing the spending done by our competitors. The main disadvantage of this method is that it may not be necessary that our objectives/goals are the same as our competitors.

COMPETITIVE PARITY V/S COMPETITIVE ADVANTAGE?

Competitive Parity refers to spending at par with your competitors, whereas in competitive advantage we spend to outperform our competitors. In competitive parity the products offered by the competitors are similar in nature and the product can be easily substituted. Many FMCG products are to be considered as the competitive parity products. It is very difficult to change the pricing in the market.

Key Advantages of Competitive Parity:

The main advantage of this strategy is to calculate the advertising and branding expenditure because it will be similar to our competitors. The spending on promotion and brand presence will be at par as planned by our competitors. The Promotion outcome and customer reach will match as of our competitor. That means there will be less overspending of budget.

Various companies are using demand forecasting method and sales forecasting methods to predict sales in the near future. Instead of using the forecasting methods, which is quite expensive and consume lots of funds, using competitive parity method is easy and less expensive. In that we have to predict the major expenditure by our competitors which is fairly easy to calculate.

Brand can be benefited from the decision taken by its competitors over pricing. If a brand has increased the price of its product, then it will get substituted by the similar product of the other brand and thus increasing the sale of brand with price advantage.

The above listed advantages are not true in each and every company case, It may be advantageous for one but not at all useful for another company. It also depends on the financial conditions and the competitive positioning of a brand. Company with less advertising budget this strategy will not suit well.

Disadvantages of Competitive Parity:

The main disadvantage of the competitive parity method, when you’re defining your product goal it will not be similar to the competitors goal. His goal may be to increase the brand awareness. Yours may be to increase the number of units sold in a period of time. So while implementing competitive parity budgeting method we may take wrong decision to emulate the budgets of competitors.

For new entrants in the market, it is very difficult to implement the strategy because it wants huge budget to be implemented. They have to bear exorbitant opportunity cost, they will not be able to match up the competitor they will get perished in the process.So it is not advised to the new players in the market to implement competitive parity budgeting method until and unless market is at a nascent stage and the market is very new in existence. Instead, they can focus on competitive advantage so as to increase the chances of survival.

If we look at the brands, they tend to spend a huge amount of money on promotion of the products which are not at all competitive and different in nature. But while competing, companies tend to forget the basic concept and keep raising their budgets on promotions.

If we look at the Uber and Lyft they are competing in the huge competitive market and raising their promotion budgets, so as to get as much advertising space as they can buy either it can be online or billboards or on Television. If we look at the advertising space online, both are competing for the same audience and flood their ads to the customers so as to overtake one another but in this process they are spending a huge chunk of money. The online spaces are filled with the marketing strategy and tactics to lure customers.