Promotional Costs: Definition, How to Calculate and Sample Budget

in business, promotion needed in order to improve brand awareness and sales of products or services that the company offers. The promotion can influence consumers in making decisions.

In addition, promotion also aims to foster customer perception of a need, encourage the selection of a product, compensate for the weaknesses of other marketing mix elements, and instill a product and company image.

In carrying out promotional activities, companies need costs. So, what is meant by promotional costs? The following is an explanation regarding the meaning, role, how to calculate and an example of the form of the budget.

What are Promotional Fees?

Basically, promotional costs are the value sacrificed or incurred by a company for promotional purposes, which are related to the marketing of products or services offered by the company.

These costs play a role in supporting sales targets. The costs incurred for promotion, considering the results or impacts to be obtained with the budget owned by the company.

How to Calculate Promotional Costs

Promotional costs or budgets are determined by the company by adding up all costs incurred by the company during the promotion of its products or services. These costs are included in the marketing budget.

The amount will also vary depending on the product and market situation. There is no standard regarding the maximum or minimum amount of expenditure that must be issued by the company. The total cost will be related to the type and promotional tools used.

Even so, experts formulate rule-of-thumb which can be used as a reference in determining the company's budget for promotion. Here are some of the methods and approaches:

Marginal Approach

In this approach to determining the amount of expenditure for this one company, the ideal expenditure for each promotional activity can be determined by the formula MR = MC (marginal revenue = marginal cost).

Breakdown Method

This method consists of several approaches, including:

• Percentage of Sales Approach

In this approach, the amount of the promotional activity budget is determined based on a certain percentage of sales. For example, from last year's sales, predictions of next year's sales or from selling prices.

• Affordable Method

The amount of the promotion budget determined based on this method is determined based on management estimates based on the company's financial capabilities. In other words, its magnitude depends on budget provided by the company.

• Return On Investment Approach

This approach considers the costs incurred for promotion as an investment. Therefore, the amount of the promotion budget is determined by comparing the level of return expected and level return what the company wants.

• Competitive Parity Approach

The assumption of this approach is that the promotion budget issued by the company must be equal to the promotion expenditure of its competitors. The cost of promotion from one company to another is a collective policy of an industry. The goal is not to change market share.

Build Up Method

In this method, the method of determining the promotion budget is by first determining the tasks and objectives of the promotion of each product and the costs to achieve these goals.

Promotional Budget Detail Form Example

Source: Aang Munawar, Research Gate (Review of Promotional Costs in Achieving Sales Targets, 2014)