Advertising Budget - Competitive Parity Method: (A&BM 30Sept2020)

Advertising Budget

(4) Competitive Parity Method:

Competition is one of the powerful factors affecting marketing performance. This method considers the competitors’ advertising activities and costs for setting advertising budget. The advertising budget is fixed on the basis of advertising strategy adopted by the competitors.

Thus, competitive factor is given more importance in deciding advertising budget. For example, if the close competitors spend 3% of net sales, the company will spend, more or less, the same per cent for advertising. Here it is assumed that “competitors or leaders are always right.” If not followed carefully, this method may result into misleading.

It is obvious that a company differs significantly from the competitors in terms of product characteristics, objectives, sales, financial conditions, management philosophy, other promotional means and expenses, image and reputation, price, etc.

Therefore, it is not advisable to follow the competitors blindly. Marketing/advertising manager should take competitors’ advertising strategy as the base, but should not follow as it is. The advertising budget must be adjusted to the company’s internal and external situation.

This method involves setting budgets to match competitors’ outlays and funds. In this method, the company monitors competitors’ advertising and follows it. This method is generally used in markets in which advertising is heavier and it is felt absolutely important to the companies not to be left behind the competitors.

Normally, it is felt that the brand leader needs to spend proportionately less as a share of total advertising to maintain its market share, while conversely a brand trying to improve its market share will have to spend proportionately more. But such a type of budgeting plan fails to reflect the firms’ own advertising needs or marketing requirements.

None of the marketing managers in practice ever will accept the fact that they set their advertising and promotions budgets on the basis of what their competitors allocate. But a close examination of their advertising expenditures, both as a percentage of sales and in respect to the media where they are allocated, will show little variation in the percentage-of-sales figures for firms within a given industry.

The rationale for setting the budget this way is that the collective wisdom of the industry is involved. Some are of the opinion that since it takes the competition into consideration, marketplace is more stable and marketing warfare is minimized in turn minimizing the unusual or unrealistic ad expenditures.

 

Limitations:

1. In case of a new product, the method fails to guide for deciding on advertising budget.

2. It is difficult to know in which stage of life cycle the product of close competitor is passing through.

3. Company differs in terms of sales, profits, challenges, financial conditions, and so on. To follow competitors directly may be erroneous.

4. Advertising is not the sole factors that affect the sales; interplay of many factors determines sales.

5. In case, when there are many competitors, it is difficult to decide as to whom the company should follow.

6. The method is followed only when there are dominant competitors. In absence of competition, the method cannot be used.

7. The method can make a sense only to followers and challengers. It is not applicable to a market leader.

8. It ignores the fact that advertising and promotions are designed to accomplish specific objectives and not merely to face competition.

9. It assumes that the ad campaigns will be equally effective because firms have done similar expenditures. This highly ignores the contributions of creative executions and/or media allocations.

10. It ignores a very natural possibility that some companies simply make better products than others.

11. There is no guarantee that competitors will not increase or decrease its own expenditures, regardless of what other companies do because competition cannot be fully assessed at the beginning of a financial year.

12. Finally there is no reason why competitive parity should avoid promotional wars. We are a witness to the Coke versus Pepsi wars.

Nevertheless, companies employ the competitive parity method. But a wiser decision is not to ignore the competition but use this method in conjunction with the percentage-of-sales or other methods. Marketing never suggests to always keep parity with competitors however it suggests a very meticulous vigilant on them.

 

Advantages of Competitive Parity

One of the key advantages of using this method to calculate the advertising and branding expenditure is that a business will not be too far away from competitors. The spending will match that of the competitors and the visibility of the brand and its exposure to potential customers will match that of the competitors. This means that the brand is not overspending much.

Many companies use sales forecasts and demand forecasts to predict what their spend on branding and advertising activities should be for future periods, but this method is relatively simple and does away with complicated forecasting methods. Due to this drastic changes in the advertising expenses, if made by competitors, can be easily replicated because it is easy to calculate the necessary expenditure.

The above stated advantages needn’t always be advantageous for the company. As stand alone points they are definitely advantageous but can vary from situation to situation. For a company that is not doing so well financially, this kind of advertising and branding budgeting may not bode well.

Disadvantages of Competitive Parity

For new players in the market, following this kind of a model might prove disastrous. They will have to bear huge opportunity costs to be able to match up to the advertising and branding budgets of existing big players in the market. This might prove detrimental to their financial health and lead them into huge losses. For new entrants, this kind of budgeting is not always advised unless the market in itself is very new and still in its nascent stages in which case it makes sense as all the competitors are relatively new too.

Another trap that businesses usually fall into is spending exorbitant amounts of money on products that are different in nature and not totally competitive. Two companies might have products that are competitors but they may also have products that are not competitive. But the competition gets so intense that companies forget this and keep raising their spending on branding and advertising even when it is not required.

If you follow the advertising of certain competitors closely, you will observe them competing with each other, therefore matching their spending on advertising and branding. Take the example of Flipkart, Amazon and Snapdeal.