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How service firms set their marketing budgets
Service level and quality are closely related to revenues and expenditures. The e..pected value of the service by the consumer is eventually translated in the managerial process into budgets. However, although budgeting is a fundamental planning and control function of marketing managers, the subject is scantily addressed in marketing textbooks. A survey of the literature reveals the paucity of empirical researches on this subject. Furthermore, most of the studies that address the issue of budgeting have focused on the budgeting of advertising. Studies on advertising budget fall in two broad categories: advertising expenditures and budget setting methods. The relationship between advertising sales and profits has long been a subject of interest, controversy, and research; advertising-to-sales ratios in particular have been studied [I, 5, 9, 141. Other studies have sought to sess how advertisers set their budgets [2, 8, 10-121. ective and task, affordable, percentage of past years sales, match competitors, and percentage of anticipated sales methods are the most frequently reported methods; quantitative methods, arbitrary, and other methods are less used.
Addrex
correspondence IO Professor Pierre Filiatrault, Director, Center for
Research in Management, University of Quebec at Montreal. P.O. Box 8888, Station “A”
, :Aontreal,
Quebec H3C 3P8, Canada.
Ir~Justritrl IllcrrLcrrr~
Marketing budget appropriation and allocation [4, 6, 131 and participation [3, 71 have been investigated. Surprisingly little has been published on marketing budgetsettil;g methods, and nothing on marketing budget-setting methods in service firms. This study examines the budgeting practices of Canadian service firms. Specitically, the objectives were to: 1. Determine current methods of setting marketing budgets; 2. Investigate the relation of current methods to organizational characteristics; and 3. Examine the relation of current methods to marketing management practices and activities.
ETHODOLQGY The sample frame for this study consisted of firms located in Quebec, Canada, and listed by Dun and Bradstreet. A random sampling procedure was used to select 2,500 firms. A total of 3 14 questionnaires were returned; 293 were suitable for analysis. After eliminating 3 1 questionnaires because total annual sales were below $1 mulion, 262 questionnaires were analyzed. The questionnaire was composed of four blocks of questions. In the first block, respondents were asked to describe their firm in terms of type of industry, total sales, number of employees, etc. In the second block, orga-
nizational characteristics of the marketing function were ascertained. In the third block, managers were asked questions about their marketing management practices and activitiec; they were given a list of the five most common methods of budget-setting, as determined through personal interviews carried out in the preliminary
phase of the research. Respondents were requested to check off all the methods currently used by their firm. The fourth block focused on psychological and sociodemographic characteristics of the resrjondents. Because of the large number of items (a total of 184 variables), it was judged most appropriate to mail the questionnaires. A questionnaire, covering letter, and postage-paid return envelope were sent to the marketing manager or the highest-ranked officer listed tor each firm in Pun and Bradstreet.
in
s Usage
In-depth interviews conducted in the explnratcrg phase of the research revea!c;l th& the methods used to determine marketing budget were similar to the advertising budget methods most commonly found in the
literature (percentage of Ilticipated sales, match competitors, affordable, and objective and task), except for the historical marketing budget. The historical marketing budget was defined as the total amount of the firm budget previously allocated to marketing expenses. In addition to these five possible methods, an open-ended question allowed for other methods to tie reported as
analyzed with rega Usage varies accord acterisaics of service
PIERRE FILIATRAULT IS Director of the Center for Research In Manageinent at the Unwersity of Quebec at Montreal JEAWC’-iARLES at the diversity -
CHEBAT is John-Labatt of Quebec at Montreal
Marketing
well as their usage. Small, medium, and large-sized firms, as determined by total annual sales (above $1 million) from all types of service industries (transportation, communications, finance, insurance. real estate, health, leisure, hospitality, an rsonal services) represented in the sample. Results show that service firms use most of these five methods somehow concurrently, and other methods are seldom used (Table 1). Historical marketing budget is the most frequently used method, followed closely by objective and task and percentage of anticipated sales. Far behind is the “affordable” method; lastly come “match competitors” and other methods. Although the mean usage of other methods is above the match competitors method mean, only 15.3% of respondents use methods other than those specified. Usage difference of marketing budget-setting methods in service firms was then analyzed through a t-test between variables (paired samples); results are presented in Table 2. Usage is statisticaily different at the 0.001 level between all five specified methods except between the objective and task and percentage of anticipated sales; usage of t two methods is similar. Among those who use other ods, use is significantly less frequent than thd historical marketing budget, objective and task, and percentage of anticipated sales. But there is no significant difference in usage with the less used specified methods (affordable and match competitors).
objective
Professor -
(F=
and task met
10.601, P
TABLE
1
ing Bud
to two ch~cte~st~cs
Never
(1) HistoricalMarketing 19.I
Occasfonaily Always (21 (3
34.4
46.5
2.27
I
241
33.9
34 8
2.03
3
233 225
Budget Percentage of Anticipated Sales
31.3
Match Competitors
82.7
16.9
0.4
I.18
6
Affordable
50.4
32.3
17.3
I.66
4
226
Objective and Task
26.2
26.2
322
2
2
233
Other Methods
88.1
IQ.8
8.1
1.27
5
37
creased much in the past five years (F= 4.715, P= .OS), and they forecast an important increase in the next five years (F= 4.154, P= 0.05). The objective and task method is used more often in service firms having a larger total number of employees (F= 3.693, P= 0.05). There is no relztioli between the usage of the objective and task method and the number of marketing employees and the percentage of marketing expenses to total sales. There are no statistically significant differences with regard to these variables in the usage of the percentage of anticipated sales and the ‘ ‘affordable’ ’ methods, except tage of marketing-expenses-to-total-sales ratio: interestingly enough, service firms that use the percentage of anticipated sales method (F= 23.224, P= 0.001) or the affordable method (F= 10.266, P= 0.01) have a higher ratio of marketing expenses to total sales. The percentage of sales method was also used more often in firms employing more marketing personnel. Service firms
differences were identified with regard to the other budgeting methods. The objective and task method thus appears to be used by more dynamic service firms, and the percentage of sales method by firms that spend relatively more on marketing and the historical marketing budget method by larger firms, having a relatively stable level of activity in a lower-tech industry.
The methods of determination of marketing budgets were also analyzed with regard to various marketing activities practices in service firms (Table 3). The usage of the objective and task method was most significant with regard to a number of these practices. This method is used by service firms engaging in a very wide range of marketing activities: publication of catalogs, brochures, employee journals, or newsletters; attendance and participation in exhibitions; public relations; tele-marketing; and so on. The “match competitors” method is used more often by firms more active generally in advertising and promotion activities, whereas those focusing on mass advertising (TV, radio, and newspaper) prefer the historical marketing
TABLE 2 e?hods in Service Firms’
Historical Marketing Budget ercent of Ant;cipated Sales Match Competitors Affordable Objective and Task Other Methods *Student’s r-test two-tail probability
Historical Marketing Budget
Percentage of Anticipated Sales
-
0.000 -
Match Cnmpet~tors 0.000 0.000 -
Affordable 0.000 0.000 0.000 -
Objectwe am Task
Other Methods
0.001 NS o.ooo 0.000 -
0.000 0.02 I NS NS O.W?
budget. Firms more engaged in personal communication activities (annual sales meetings, meetings with intermediaries, and telemarketing) use the percentage of anticipated sales method.
The present study identifies how service firms set their marketing budgets. The historical marketing budget is the most popular method. It is used more often by larger service firms having a relatively stable level of activity in a lower-tech industry, but that are big advertisers. The objective and task method is used by more dynamic firms-high-tech industry firms, spending more on R&D and exporting more. These firms have seen their level of activity increase significantly in the past five years and they foresee the same for the next five years. These firms alsc engage in a large variety of marketing activities. The percentage of sales method is equally prevailing. The pcrcencage of sales method is used more often in firms that have more marketing employees and allocate a higher percentage of their total sales to marketing expenses; these firms are more active in personal communication than in mass communication. The affordable method is TABLE 3 arketing Budget-Setting
arketing Management Activities Practices’ Historical Marketing Budget
Catalog
less popular, and match competitors even less so; other methods are seldom used. This study provides interesting information to managers on how service firms set their marketing budget. It points out that a method, not reported before, is the most popular method of setting marketing budgets: the historical marketing budget method. It also shows how the usage of the method of determination of marketing budget varies according to organizational characteristics of firms and marketing activities practices. Marketing management, and in particular marketing budgeting, have received relatively little attention from researchers. Not much is known about the efficiency of marketing budget setting methods, or about the characteristics of managers who use them. Contingency studies considering individual, organizational, and environmental characteristics are also certainly of interest. The present findings suggest the need for further research on marketing budget-setting methods and processes and may provide the impetus for managers and researchers to realize that the fundamental role of marketing managers is, above all, to manage the marketing function. This study shows that the choice of marketing budgeting practices is not randomly made; on the contrary it is related to organizational and managerial characteristics.
NS
Percentage of Anticipated Sales
Match Competitors
Affordable
Objective and Task
Other Methods
NS
NS
NS
(0.001)
NS
(0.01)
(0.01)
NS
NS
(0.01)
NS
Annual Sales Meeting
NS
(0.001)
(0.05)
KS
NS
NS
Meeting With Intermediaries
NS
(0.05)
NS
NS
(0.01)
NS
Attendance at Exhibition
NS
NS
NS
NS
(0.01)
NS
Participation in Exhtbitlon as ExhibI:ors
NS
KS
(0.05)
NS
(O.OI)
NS
Radio and TV Ads
(0.01)
NS
(0.01)
NS
NS
(0.03
Newspaper Ads
(0.05)
NS
NS
NS
NS
NS
Consumer Magazine Ads
NS
NS
(0.05)
NS
(0.05)
NS
Professional Magazine Ads
NS
NS
(0.05)
NS
(O.oQt)
NS
Public Relations Activities
NS
NS
NS
NS
(0.001)
NS
Telemarketing
Ivc
(0.05)
NS
NS
(0.01)
NS
NS
NS
NS
(0.001)
NS
Price List
Employee Journal or Newsletter *Analysis of vanance (probability)
(iI.01)
practices conceptually relate to each other remains an ortant area of research, to be analyzed in further studies.
IX. Jon M. Hawes. ed., OH, 278-282 (1987).
Academy of Marketing Science. Akron,
7. Hardy. John W., andOrton. Boyce B., The Use of Planning and Budgeting: An Empirical Study, Managerial Plunning (November. hmhr), 39-42 ( 1982). 8. Lilien. Gary L.. Silk, Alvin J.. Choffray. Jean-Marie, and Rae. Mu& dhar, Industrial Advertising Effects and Budgeting Practices. Jw& of Marketing 40 (January), 16-24 t 1976).
I. Adams, Arthur J., and Moriarty, Mark M.. The Advertising-Sales Relationships: Insights from Transfer-Function Modeling. Journal of Advertising Research 21 (3). 41-46 (1981).
2. Blasko. Vincent J.. and Patti, Charles H.. The Advertising Budgeting Practices of Industrial Marketers, Joarnul af Marketing 48, 104-I IO
9. Marquardt. Raymond A., and Murdock, Gene W., The SdeslAdvertising Relationship: An Jnvestigation of Correlations and Consistency in Supermarkets and Department Stores, Journal of Advertising Research 24 (October. November). 55-60 (1984). IO. Patti, Charles H., and Blasko. Vincent J., Budgeting Practices of Big Advertkeen.
Research 2l(December),
Journal of Advertising Research 17, 77-79
3. Brownell, Peter. Budgetary Systems and the Control of Functionally Differentiated Organizational Activities, Journal of Accoanting Research 23, (1985).
4. Elridge, Clarence E., The Marketing Budget and Its Allocation. Ink 35-44
of Advertising
Primers’
(1967).
5. Fart%, Paul, and Albion. Mark S., Determinants of the Advettising-toSales Ratio, JournalofAdverfising Research 21 (February), 19-27 ( 198I). 6. Filiatrault, Pierre. and Chebat, Jean-Charles. Marketing Budgeting Practices: An Empirical Study, in Developments in Marketing Science, Vol.
23-29
II. Permut, Steven E., How European Managers Set Advertising budgets,
(1984).
502-512
Journal
(1981).
12.
( 1977).
Augustine, Andre J., and Foley, William E., How Large Advertisers Set Budgets, Journal of Advertising Research 15 (October) I I-16 ( 1975). San
13. Schlissel, Martin J., and Giacalone. Joseph A., Budget the Planned Marketing Strategy, in Developments in Marketing Science, Vol. III, Venkatakrisna V. Bellur, James W. Camerius, and Brian G. Gnauk, eds.. The Academy of Marketing Science, Akron, OH, 1980, p. 138-142. 14. Zif, Jehiel, Young, Robert F.. and Fenwick. Ian, A Transnational Study of Advertising to Sales Ratios, Journal of Advertising Research 24 (JuneJuly), 58-63 ( 1984).
Addrex
correspondence IO Professor Pierre Filiatrault, Director, Center for
Research in Management, University of Quebec at Montreal. P.O. Box 8888, Station “A”
, :Aontreal,
Quebec H3C 3P8, Canada.
Ir~Justritrl IllcrrLcrrr~
Marketing budget appropriation and allocation [4, 6, 131 and participation [3, 71 have been investigated. Surprisingly little has been published on marketing budgetsettil;g methods, and nothing on marketing budget-setting methods in service firms. This study examines the budgeting practices of Canadian service firms. Specitically, the objectives were to: 1. Determine current methods of setting marketing budgets; 2. Investigate the relation of current methods to organizational characteristics; and 3. Examine the relation of current methods to marketing management practices and activities.
ETHODOLQGY The sample frame for this study consisted of firms located in Quebec, Canada, and listed by Dun and Bradstreet. A random sampling procedure was used to select 2,500 firms. A total of 3 14 questionnaires were returned; 293 were suitable for analysis. After eliminating 3 1 questionnaires because total annual sales were below $1 mulion, 262 questionnaires were analyzed. The questionnaire was composed of four blocks of questions. In the first block, respondents were asked to describe their firm in terms of type of industry, total sales, number of employees, etc. In the second block, orga-
nizational characteristics of the marketing function were ascertained. In the third block, managers were asked questions about their marketing management practices and activitiec; they were given a list of the five most common methods of budget-setting, as determined through personal interviews carried out in the preliminary
phase of the research. Respondents were requested to check off all the methods currently used by their firm. The fourth block focused on psychological and sociodemographic characteristics of the resrjondents. Because of the large number of items (a total of 184 variables), it was judged most appropriate to mail the questionnaires. A questionnaire, covering letter, and postage-paid return envelope were sent to the marketing manager or the highest-ranked officer listed tor each firm in Pun and Bradstreet.
in
s Usage
In-depth interviews conducted in the explnratcrg phase of the research revea!c;l th& the methods used to determine marketing budget were similar to the advertising budget methods most commonly found in the
literature (percentage of Ilticipated sales, match competitors, affordable, and objective and task), except for the historical marketing budget. The historical marketing budget was defined as the total amount of the firm budget previously allocated to marketing expenses. In addition to these five possible methods, an open-ended question allowed for other methods to tie reported as
analyzed with rega Usage varies accord acterisaics of service
PIERRE FILIATRAULT IS Director of the Center for Research In Manageinent at the Unwersity of Quebec at Montreal JEAWC’-iARLES at the diversity -
CHEBAT is John-Labatt of Quebec at Montreal
Marketing
well as their usage. Small, medium, and large-sized firms, as determined by total annual sales (above $1 million) from all types of service industries (transportation, communications, finance, insurance. real estate, health, leisure, hospitality, an rsonal services) represented in the sample. Results show that service firms use most of these five methods somehow concurrently, and other methods are seldom used (Table 1). Historical marketing budget is the most frequently used method, followed closely by objective and task and percentage of anticipated sales. Far behind is the “affordable” method; lastly come “match competitors” and other methods. Although the mean usage of other methods is above the match competitors method mean, only 15.3% of respondents use methods other than those specified. Usage difference of marketing budget-setting methods in service firms was then analyzed through a t-test between variables (paired samples); results are presented in Table 2. Usage is statisticaily different at the 0.001 level between all five specified methods except between the objective and task and percentage of anticipated sales; usage of t two methods is similar. Among those who use other ods, use is significantly less frequent than thd historical marketing budget, objective and task, and percentage of anticipated sales. But there is no significant difference in usage with the less used specified methods (affordable and match competitors).
objective
Professor -
(F=
and task met
10.601, P
TABLE
1
ing Bud
to two ch~cte~st~cs
Never
(1) HistoricalMarketing 19.I
Occasfonaily Always (21 (3
34.4
46.5
2.27
I
241
33.9
34 8
2.03
3
233 225
Budget Percentage of Anticipated Sales
31.3
Match Competitors
82.7
16.9
0.4
I.18
6
Affordable
50.4
32.3
17.3
I.66
4
226
Objective and Task
26.2
26.2
322
2
2
233
Other Methods
88.1
IQ.8
8.1
1.27
5
37
creased much in the past five years (F= 4.715, P= .OS), and they forecast an important increase in the next five years (F= 4.154, P= 0.05). The objective and task method is used more often in service firms having a larger total number of employees (F= 3.693, P= 0.05). There is no relztioli between the usage of the objective and task method and the number of marketing employees and the percentage of marketing expenses to total sales. There are no statistically significant differences with regard to these variables in the usage of the percentage of anticipated sales and the ‘ ‘affordable’ ’ methods, except tage of marketing-expenses-to-total-sales ratio: interestingly enough, service firms that use the percentage of anticipated sales method (F= 23.224, P= 0.001) or the affordable method (F= 10.266, P= 0.01) have a higher ratio of marketing expenses to total sales. The percentage of sales method was also used more often in firms employing more marketing personnel. Service firms
differences were identified with regard to the other budgeting methods. The objective and task method thus appears to be used by more dynamic service firms, and the percentage of sales method by firms that spend relatively more on marketing and the historical marketing budget method by larger firms, having a relatively stable level of activity in a lower-tech industry.
The methods of determination of marketing budgets were also analyzed with regard to various marketing activities practices in service firms (Table 3). The usage of the objective and task method was most significant with regard to a number of these practices. This method is used by service firms engaging in a very wide range of marketing activities: publication of catalogs, brochures, employee journals, or newsletters; attendance and participation in exhibitions; public relations; tele-marketing; and so on. The “match competitors” method is used more often by firms more active generally in advertising and promotion activities, whereas those focusing on mass advertising (TV, radio, and newspaper) prefer the historical marketing
TABLE 2 e?hods in Service Firms’
Historical Marketing Budget ercent of Ant;cipated Sales Match Competitors Affordable Objective and Task Other Methods *Student’s r-test two-tail probability
Historical Marketing Budget
Percentage of Anticipated Sales
-
0.000 -
Match Cnmpet~tors 0.000 0.000 -
Affordable 0.000 0.000 0.000 -
Objectwe am Task
Other Methods
0.001 NS o.ooo 0.000 -
0.000 0.02 I NS NS O.W?
budget. Firms more engaged in personal communication activities (annual sales meetings, meetings with intermediaries, and telemarketing) use the percentage of anticipated sales method.
The present study identifies how service firms set their marketing budgets. The historical marketing budget is the most popular method. It is used more often by larger service firms having a relatively stable level of activity in a lower-tech industry, but that are big advertisers. The objective and task method is used by more dynamic firms-high-tech industry firms, spending more on R&D and exporting more. These firms have seen their level of activity increase significantly in the past five years and they foresee the same for the next five years. These firms alsc engage in a large variety of marketing activities. The percentage of sales method is equally prevailing. The pcrcencage of sales method is used more often in firms that have more marketing employees and allocate a higher percentage of their total sales to marketing expenses; these firms are more active in personal communication than in mass communication. The affordable method is TABLE 3 arketing Budget-Setting
arketing Management Activities Practices’ Historical Marketing Budget
Catalog
less popular, and match competitors even less so; other methods are seldom used. This study provides interesting information to managers on how service firms set their marketing budget. It points out that a method, not reported before, is the most popular method of setting marketing budgets: the historical marketing budget method. It also shows how the usage of the method of determination of marketing budget varies according to organizational characteristics of firms and marketing activities practices. Marketing management, and in particular marketing budgeting, have received relatively little attention from researchers. Not much is known about the efficiency of marketing budget setting methods, or about the characteristics of managers who use them. Contingency studies considering individual, organizational, and environmental characteristics are also certainly of interest. The present findings suggest the need for further research on marketing budget-setting methods and processes and may provide the impetus for managers and researchers to realize that the fundamental role of marketing managers is, above all, to manage the marketing function. This study shows that the choice of marketing budgeting practices is not randomly made; on the contrary it is related to organizational and managerial characteristics.
NS
Percentage of Anticipated Sales
Match Competitors
Affordable
Objective and Task
Other Methods
NS
NS
NS
(0.001)
NS
(0.01)
(0.01)
NS
NS
(0.01)
NS
Annual Sales Meeting
NS
(0.001)
(0.05)
KS
NS
NS
Meeting With Intermediaries
NS
(0.05)
NS
NS
(0.01)
NS
Attendance at Exhibition
NS
NS
NS
NS
(0.01)
NS
Participation in Exhtbitlon as ExhibI:ors
NS
KS
(0.05)
NS
(O.OI)
NS
Radio and TV Ads
(0.01)
NS
(0.01)
NS
NS
(0.03
Newspaper Ads
(0.05)
NS
NS
NS
NS
NS
Consumer Magazine Ads
NS
NS
(0.05)
NS
(0.05)
NS
Professional Magazine Ads
NS
NS
(0.05)
NS
(O.oQt)
NS
Public Relations Activities
NS
NS
NS
NS
(0.001)
NS
Telemarketing
Ivc
(0.05)
NS
NS
(0.01)
NS
NS
NS
NS
(0.001)
NS
Price List
Employee Journal or Newsletter *Analysis of vanance (probability)
(iI.01)
practices conceptually relate to each other remains an ortant area of research, to be analyzed in further studies.
IX. Jon M. Hawes. ed., OH, 278-282 (1987).
Academy of Marketing Science. Akron,
7. Hardy. John W., andOrton. Boyce B., The Use of Planning and Budgeting: An Empirical Study, Managerial Plunning (November. hmhr), 39-42 ( 1982). 8. Lilien. Gary L.. Silk, Alvin J.. Choffray. Jean-Marie, and Rae. Mu& dhar, Industrial Advertising Effects and Budgeting Practices. Jw& of Marketing 40 (January), 16-24 t 1976).
I. Adams, Arthur J., and Moriarty, Mark M.. The Advertising-Sales Relationships: Insights from Transfer-Function Modeling. Journal of Advertising Research 21 (3). 41-46 (1981).
2. Blasko. Vincent J.. and Patti, Charles H.. The Advertising Budgeting Practices of Industrial Marketers, Joarnul af Marketing 48, 104-I IO
9. Marquardt. Raymond A., and Murdock, Gene W., The SdeslAdvertising Relationship: An Jnvestigation of Correlations and Consistency in Supermarkets and Department Stores, Journal of Advertising Research 24 (October. November). 55-60 (1984). IO. Patti, Charles H., and Blasko. Vincent J., Budgeting Practices of Big Advertkeen.
Research 2l(December),
Journal of Advertising Research 17, 77-79
3. Brownell, Peter. Budgetary Systems and the Control of Functionally Differentiated Organizational Activities, Journal of Accoanting Research 23, (1985).
4. Elridge, Clarence E., The Marketing Budget and Its Allocation. Ink 35-44
of Advertising
Primers’
(1967).
5. Fart%, Paul, and Albion. Mark S., Determinants of the Advettising-toSales Ratio, JournalofAdverfising Research 21 (February), 19-27 ( 198I). 6. Filiatrault, Pierre. and Chebat, Jean-Charles. Marketing Budgeting Practices: An Empirical Study, in Developments in Marketing Science, Vol.
23-29
II. Permut, Steven E., How European Managers Set Advertising budgets,
(1984).
502-512
Journal
(1981).
12.
( 1977).
Augustine, Andre J., and Foley, William E., How Large Advertisers Set Budgets, Journal of Advertising Research 15 (October) I I-16 ( 1975). San
13. Schlissel, Martin J., and Giacalone. Joseph A., Budget the Planned Marketing Strategy, in Developments in Marketing Science, Vol. III, Venkatakrisna V. Bellur, James W. Camerius, and Brian G. Gnauk, eds.. The Academy of Marketing Science, Akron, OH, 1980, p. 138-142. 14. Zif, Jehiel, Young, Robert F.. and Fenwick. Ian, A Transnational Study of Advertising to Sales Ratios, Journal of Advertising Research 24 (JuneJuly), 58-63 ( 1984).