Marketing Finance - Evaluation of Promotional Spends


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In this presentation, we will understand the scope of promotional spending, to measure and evaluate such spending, in details.
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Marketing Finance - Evaluation of Promotional Spends

  1. 1. Learning Objectives Understand What is meant by and the scope of promotional spendings. To set some standards to measure and evaluate such spendings. To be in a position to question the logic of promotional expenditure. Chapter Nine Evaluation of Promotional Spends 1
  2. 2. Structure 9.1 Introduction. 9.2 Advertising. 9.3 Sales Promotion. 9.4 Summary Chapter Nine Evaluation of Promotional Spends 2
  3. 3. 9.1 IntroductionTo promote and maintain market share of products sold or tobe sold, it is necessary for the organization to spend moneyon advertising and sales promotion.To ensure that funds applied on these activities are fruitfullyspent, it is necessary that these expenses are periodicallyevaluated.This evaluation will be realistic if good standards are set up tomeasure and evaluate the activities and amounts spent onthem. Chapter Nine Evaluation of Promotional Spends 3
  4. 4. 9.2 AdvertisingPromotional spending can be in two distinct areas. The firstone is advertising. By definition advertising is any form of paidmass communication. Advertising by its nature is a one waycommunication and hence lacks the element of engagingsome one in two way interaction.Advertising carries tasks like Create awareness in its offerings by inviting attention ofthe target group. Create interest in the group Convert it into a desire and Ultimately make the group to act by making a sale.This is known as AIDA model of advertising. Chapter Nine Evaluation of Promotional Spends 4
  5. 5. 9.2 AdvertisingSeveral alternatives are available while choosing medium foradvertising. They range from Radio / TV / Cinema tostationary outdoor media like hoardings, bill boards etc. Onecan have mobile adaptations in the form of bus bodies, taxisides or mobile hoardings.Other important media is the print. – extending from lay pressto magazines , hand bills to mailers. Today electronic media is most popular.Selection of appropriate medium depends on the objective ofadvertising and nature of the product. If the objective is tocreate quick awareness electronic media serves the purpose. Chapter Nine Evaluation of Promotional Spends 5
  6. 6. 9.2 AdvertisingNot so if intricate features [ of a computer] are to be explainedto the target audience. Here print medium is advocated.Whatever the medium, ultimate goal of several tasks thatadvertising performs is to make a sale.It is not easy to decide whether amounts expended onadvertising are resulting in additional sales, often it is notknown if the advertising has reached the target group.One model termed Return on Promotional Investment is usedby marketer to indicate which products amongst a portfolio ofproducts respond to advertising. Increase in spends on eachproduct in a year, here, is compared with their incrementalsales. Chapter Nine Evaluation of Promotional Spends 6
  7. 7. 9.2 AdvertisingProduct Sales Rs Lacs Advtg Spends Rs lacs 2007 2008 -ce 2007 2008 -ce A 190 220 30 20 30 10 B 100 170 70 20 30 10 C 250 290 40 20 30 10 D 60 76 16 20 30 10 E 300 370 70 20 30 10Total 900 1126 226 100 150 50You can see that increase of Rs. 50 lacs in advertising hasresulted in new sales of Rs. 226 lacs , a 4.52 fold increase .Increase in B & E is significant while that in A & D isdisappointing. Chapter Nine Evaluation of Promotional Spends 7
  8. 8. 9.2 AdvertisingJust a year’s figures cannot be decisive, hence data over alonger period has to be reviewed. If such data confirms thatincrease in sales of A and D are below average, then we canconclude that for these two products advertising is not havingdesired effects.If these products are at growth or late introductory stage , it isnecessary to evaluate the advertisement campaign afresh asto its contents, creative ideas and the medium being used.However, if the products are at their maturity stage, it may beprudent to divert spends on other products where returns arehigher. Chapter Nine Evaluation of Promotional Spends 8
  9. 9. 9.3 Sales PromotionUnlike advertising , where it is difficult to correlate advertisingspends with the growth, or otherwise , of sales, in the case ofsales promotions, the connect can be made very clearly.Sales promotions are often called below the activities [BTL]as opposed to advertising which is also called above the line[ATL] activities. BTL sales promotion activities are focused onthe buyers – end consumers or intermediaries. Hence theevaluation is direct and measurable.Promotions directed against intermediaries are known as“trade loads” as they are used to load retailers shelves.Promotions focused on consumers are in the form of price off,extra free quantity or free coupons. Chapter Nine Evaluation of Promotional Spends 9
  10. 10. 9.3 Sales PromotionThus sales promotion results in reduction in gross margin ofthe promoted product. The formula used to measure effectsof the successful promotion isY(g – d) – A > X(g) whereg = gross margin on the product under promotion,d = dilution or cost that is offered per unit as promotion,A = amount to be spent on the promotion,X = the volume before promotion in the same period andY = expected [higher] volume planned to be sold duringpromotion period.In case Y(g – d) – A fail to exceed X(g) then the plannedpromotion does not recover costs incurred & be dropped. Chapter Nine Evaluation of Promotional Spends 10
  11. 11. 9.4 SummaryA financial model that is used to evaluate the effectiveness ofadvertising , called return on promotional investment (ROPI), however has a big limitation , in as much as it does notreally show how much sales the advertisement is generating,but it becomes an indicative model to find out amongst aportfolio of products which product is responding well toadvertising.This model can only be used to evaluate , in which particularproduct amongst the entire portfolio of products , advertisingis delivering. It will only help in focusing on products wherereturn is better than others. Chapter Nine Evaluation of Promotional Spends 11
  12. 12. 9.4 SummarySales promotions, which are often called as below the lineactivities [BTL] as opposed to advertising which also is calledabove the line activities [ATL], are very focused on thebuyers, be they the end consumers or intermediaries. Hencetheir effect can easily be measured and evaluation can bedone more closely.Promotions can be directed at intermediaries – which is alsoreferred to as trade loads because they are used to loadretailers shelves, or they can be directed towards endconsumer, either as price off, or an extra free quantity, or aredemption coupon or as a free additional item as a gift .Thus sales promotions result in a dilution in the gross marginof unit of sale Chapter Nine Evaluation of Promotional Spends 12
  13. 13. This brings us to the end of session nine on “ Evaluation of Promotional Spends”Next we move to the tenth session to cover “Evaluation of Channels” Till then Good Luck! Chapter Nine Evaluation of Promotional Spends 13
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