How to the Methods of Calculating Banks Marketing Budget Essay

How to Decide Banks Marketing Budget? Introduction Now a day under taking marketing activities is compulsory and a key to exist in the business environment especially in the financial sector where competition is strong. In Ethiopia there are 16 private commercial banks and three public owned banks. There is strong competition among these banks to take market share and earn profit especially for those banks that enter the market recently. In addition according to the National Bank of Ethiopia Directive, all commercial bank have to reach 500 million paid up capital in the coming four years. In order to achieve this amount of capital these banks must sell new share, persuade their existing share holders to fully pay the subscribed amount and retain the earning instead of paying the dividend. These are achieved by undertaking strong marketing campaign. All the banks have marketing budget and the budget differs based on the size and depth of their capital. However, determining the size of marketing budget is not an easy task. It is big question often asked by marketers and bank executives. In Ethiopia it is common to see Television program and football events sponsored by commercial banks, advertisement of banks products and services in any time on electronics and print media especially money transfer adverts during the holiday season, distributing giveaway materials and entertaining their customers. The marketing budget for a bank generally includes expenditures for five different activities: Advertising Debub Global Bank, MPPE Department Compiled by: Behaylu Wondafrash Promotional activities Sales promotion Marketing research Sales/customer service training and Public relations: How a bank allocates its total marketing budget among various marketing activities depends largely on bank size in terms of capital and branch distribution and advertising cost (production and air time cost). Most the Banks in Ethiopia spends about 80% of their total marketing budgets on advertising. The rest activities took 20 percent of the budget. Most banks are currently using sales promotion activity like commercial bank of Ethiopia which provide awards for who save 1000 birr and above in any branch of it and promotional activities like sponsoring Ethiopian Great Run and donating to children aid. Advertising took about 80 percent of the budget. This due to the fact that time to time increasing cost of advertising rate and production cost. The lion share of the budget is goes to the Ethiopian radio and Television Agency and then to the private FM radio stations especially Fana FM and Sheger FM. Most banks also use print media like reporter and fortune news paper. But how does a bank determine how much it should spend for marketing in general and advertising in particular? There are methods of calculation. Methods of calculation According to author of Marketing Financial Services, there are different ways to calculate a bank’s marketing budget. Banks use at least four methods to determine what they will spend on marketing in general and on advertising in particular: Debub Global Bank, MPPE Department Compiled by: Behaylu Wondafrash The percentage method, The competitive parity method, The incremental method and The objective-and-task method. 1. Percentage method: the percentage method states bank’s advertising budget is 1/10th of 1 percent of a bank’s total assets. This percentage method has several drawbacks or flaws. First, it is based on the bank’s past performance rather than on objectives for the future. Second, it views assets or deposits as the cause of advertising rather than recognizing that increases in these variables might be, to some extent, the effect of advertising. Third, it discourages aggressive advertising and reduces advertising expenditures in periods of economic slowdown. Research indicates that firms that maintain or increase their advertising during periods of recession do better after the recession. 2. Competitive parity method this method is also known as follows the leader. A bank determines what its competitors are spending on advertising and simply follows their lead. This method is based on the erroneous assumption that the market responds in the same way to the same volume of birr spent by different banks. It fails to take into account the effects of variations in creativity, different uses of media, the timing of campaigns, and a bank’s image and recognition level in its market area. Furthermore, a bank’s competitors probably use no more rational a system for determining their advertising expenditures than does the bank that is following their lead. 3. Incremental Method: under this method a bank simply increases its advertising budget by a certain percentage each year. The percentage may take Debub Global Bank, MPPE Department Compiled by: Behaylu Wondafrash into account the rate of inflation or the growth rate of the bank or it may be dictated by a planner or budgeter whose primary objective is to make the bottom line show a targeted return on assets. Whatever the percentage increase, this method does not take in to account the desired objectives of advertising and the most cost effective ways to attain them. 4. Objective-and-task method. Using this method, the bank bases its advertising budget on what it will cost to meet the marketing objectives it had defined. The bank then weighs this cost against the expected net benefit of the new business to ensure that the cost of advertising will not reduce the profit margin on the newly acquired deposits or loans beyond acceptable limits. For example, Let us take Debub Global bank (DGB) and assume that a bank’s goal is to increase its one-year deposit volume by 100 million birr over its expected normal growth during a promotion period. It calculates that the profit margin on those funds (deposits) will be 6 percent (or 6,000,000 birr). The bank must then decide how much it is willing to invest in advertising in order to generate an extra 6,000,000 birr of income. The selected amount will vary from bank to bank. This method also has its drawbacks. While it works for specific promotions that have immediately measurable results, such as increased deposit or loan volume, it cannot be used to determine the level of advertising necessary to build awareness of the bank and to develop and maintain an image for it. A bank that advertises only when it has a specific promotion to communicate may be out of the media for considerable periods of time. Most marketers agree that some maintenance level of advertising, either product or institutional, is a necessary investment, simply to keep the bank’s name in front of its publics.