A Descriptive and Normative Analysis of Marketing Budgeting

Marketing budgeting is one of the most important aspects of management and of highly relevance for business success. Due to rising competitive pressure and a considerable increase in marketing investments the importance of this subject has additionally grown in the last years. For this reason, marketing budgeting receives a huge amount of attention by research and practitioners alike. Accordingly, it is stated in the CMO Council Report of 2007: „The number-one challenge for most chief marketing officers is to quantify, measure, and improve the value of marketing investments and resource allocations“. The Marketing Science Instituteset this issue as top research priority for the time period 2010-2012: „How should firms determine the absolute level of marketing spending and how should spending be allocated at the strategic level - that is, across products, customer groups, and geographies? ” The academic literature has been dealing with questions regarding the marketing budget process for a long time and therefore this issue has been discussed and analyzed in multiple ways. The focus of this literature has been on the allocation of budgets as previous research has shown that profit improvement from better allocation is much higher than from improving the overall budget. To give an overview of the existing literature we may distinguish between two main research streams: (1) the descriptive and (2) the normative analysis of marketing budgeting. Descriptive literature discusses the status quo of the marketing budgeting process in companies, i.e. it identifies how marketing budgets are actually determined and allocated by managers. Two types of descriptive studies have emerged in the literature. The first type covers a broad range of manager surveys about budgeting behavior. They indicate that budget decisions are mainly based on the application of some simple budgeting rules, such as the “Percentage of Sales” or “Competitive Parity” method, which are easy to apply and therefore be preferred by manager. But these studies ignore for the high complexity of the budgeting process and are exposed to several biases of survey studies. Therefore insights on the budgeting process based on survey results are quite limited. The second type of descriptive studies try to explain budgeting behavior by estimating the impact of relevant factors on the observable size and allocation of the marketing budget to identify determinants of budget setting. But as all of these studies apply highly different approaches in model design results across studies about the impact of determinants on budgeting are characterized by high heterogeneity. So in summary, literature may only provide a fuzzy and fragmented picture on how manager determine their marketing budget. Normative literature discusses how the marketing budget should be determined. A large body of work assists practitioners by developing diverse approaches for allocation optimization, covering several aspects of resource allocation. All of these solutions offer important general insights into the budgeting problem but generally are not implemented in the marketing practice as they cover only some aspects of the budget allocation problem and/or give suggestions on budget allocation which are not understood and therefore are not accepted by manager. For this reason, researcher developed several heuristics or decision calculus models which address the problem that optimization models cannot be well implemented in companies and offer easy to understand and close to optimum solutions for the complex allocation problem. But while all of the heuristics are focused on short-term profit maximization and thus ignore for dynamic effects which are highly important for budget allocation, the decision calculus models may only give imprecise implications for budget allocation. This explains why the application of scientific models for resource allocation by practitioners is quite rare. The objective of this dissertation is to offer a comprehensive analysis of marketing budgeting. Therefore this work contributes to descriptive as well as normative research by addressing two main research gaps which exist in the literature. In terms of descriptive analysis the existing literature provides only a fragmented picture about influential factors in the budgeting process. In terms of normative literature no method has been developed which address the complexity of the budget allocation task for a multi-country, multi product-firm as well as the need of practitioners for simple allocation rules. The first two papers of this dissertation address the descriptive analysis issues by (1) reviewing and structuring the fragmented literature of marketing budgeting behavior, and (2) developing an innovative approach to analyze empirically the application of budgeting methods in pharmaceutical companies. The last two papers of this dissertation address the normative analysis issues by (3) introducing and implementing an innovative solution to the dynamic marketing allocation budget problem for multi-product, multi-country firms, and (4) analyzing and comparing the performance of different allocation rules by simulation analysis. In summary, the dissertation’s focus is to understand how marketing budgets are set by practitioners, and how the allocation decision process can be improved.