Q:

What are the advantages and disadvantages of the percent-of-sales method?

A:

Quick Answer

The primary advantage of the percentage-of-sales method is that companies find it to be a simple method for allocating resources to advertising by using sales performance or forecasts as an anchor. The greatest disadvantage is that advertisers disagree that sales should determine advertising, instead feeling that advertising actually drives sales.

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Full Answer

The percentage-of-sales method works by applying a set percentage of a company's budget to advertising. The actual dollar amount to advertise each product is based on the amount of sales for that product or its market share. The advantages of this method are that it keeps strong products well-advertised and that it can be changed at each budget based on actual sales or future forecasts.

Along with the basic disagreement between management and advertisers over what drives sales, the percentage-of-sales method is seen as too strict for proper allocation of funds. While well-producing products receive the lion's share of advertising, products that are new to the market, redesigned or can benefit from an increase in advertising often go underfunded. The percentage-of-sales method is also seen as inflexible, lacking the ability to deal with changing market conditions. Temporary changes in sales amounts can result in budgetary changes that may lead to overspending or underspending on a product until the changes stabilize and new sales data allows a true setting of the budget based on new sales positioning.

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