Advertising and promotions budgeting and the role of risk

Abstract

PurposeThis study aims to look at the conventional wisdom with regards to budgeting methods, processes, and sophistication in light of recent macro work relating budgetary approaches to risk‐taking.Design/methodology/approachBased on a survey of UK advertisers and personal interviews, current advertising and promotions budgeting methods and processes are summarized. A series of hypotheses relating risk, process and experience to advertising and promotions budgeting sophistication were tested.FindingsUK advertisers were found to use a variety of budgeting methods (two methods on average per company). Judgmental methods dominate, especially the “what is affordable” method, but at the same time more sophisticated methods like objective and task and measurement techniques (in particular return on investment) were solidly represented. The relationship between budgeting sophistication and risk was investigated, the premise being that risk and budgeting sophistication are inversely related, as well as budgetary processes and marketing experience.Research limitations/implicationsConsiderable insight is provided into the methods and processes being used. It is concluded that the explanation as to why firms use sophisticated or unsophisticated methods for setting their advertising and promotion budgets is largely related to organizational culture.Originality/valueJust over 1.5 percent of the UK's gross domestic product is spent on advertising and promotions (£19 billion). The study suggested that the primary reason for the lack of consensus on budgetary sophistication is that stakeholders involved with budgeting are far less concerned with specific methods than dealing with cultural norms, personalities, access to supporting data and policies and practices.