Competitive Parity: Advertising Budget Method

August 31, 2024 4 min read Marketing Advertising Business Strategy Competitive Parity Advertising Budget Marketing Strategy Budgeting Methods Business Competition

A method of setting advertising budgets based on competitors' spending levels.

Definition

Competitive Parity is a method used to set advertising budgets by aligning one’s spending with the expenditure levels of competitors. This strategy ensures that a company maintains a comparable level of advertising presence in the market, contributing to achieving a balanced competitive position.

Overview

Competitive Parity involves systematic market research to determine the advertising budgets of major competitors. Companies utilizing this method aim to avoid being overshadowed by competitors in terms of market visibility and brand awareness.

How to Implement Competitive Parity

Steps to Determine Advertising Budget

Market Analysis: Identify and analyze the primary competitors in the market.
Data Collection: Gather data on the advertising expenditures of these competitors through industry reports, market analysis, and other reliable sources.

Benchmarking: Use the gathered information to set a benchmark for your own advertising budget.

Adjustment: Adjust the budget based on your specific business needs, goals, and financial capabilities.

Special Considerations

Accuracy of Data: The effectiveness of Competitive Parity depends heavily on the accuracy and reliability of competitor data.
Market Dynamics: Constantly changing market conditions require ongoing adjustments to maintain competitive relevance.
Company Goals: Alignment with overall marketing strategy and business objectives is crucial to maximizing the effectiveness of this method.

Examples

Example 1: Tech Industry

A smartphone manufacturer may allocate its advertising budget by examining the spending patterns of key competitors like Apple and Samsung. If Samsung increases its advertising expenditure significantly, the manufacturer might follow suit to ensure it remains visible in the highly competitive market.

Example 2: Consumer Goods

A fast-moving consumer goods (FMCG) company may use competitive parity to determine its advertising budget by looking at expenditure trends in the sector by competitors like Procter & Gamble and Unilever.

Historical Context

The competitive parity approach became more common with the rise of mass media. As industries expanded and market competition intensified, companies needed tools to navigate and sustain their market presence effectively. Competitive Parity emerged as a response to these market dynamics in the late 20th century.

Applicability in Modern Marketing

Pros

Market Presence: Helps maintain visibility in competitive markets.
Simplicity: Relatively easy to implement with access to competitor data.
Risk Mitigation: Mitigates the risk of being underexposed compared to rivals.

Cons

Reactive Strategy: Mainly reactive, not bespoke to individual company’s unique needs.
Data Dependence: Effectiveness is highly dependent on accuracy and availability of competitor’s data.
Neglecting Innovation: Might discourage unique, innovative advertising strategies.

Comparison with Other Budgeting Methods

Objective-and-Task Method

Objective-and-Task involves setting advertising objectives and estimating the costs to achieve these tasks. Unlike Competitive Parity, this method is tailored to specific goals and can lead to more strategic advertising.

Percentage-of-Sales Method

Here, the advertising budget is based on a fixed percentage of past or expected sales. This method is more sales-targeted rather than competitor-focused.

Arbitrary Allocation

This method allocates a budget based on available funds or executive decisions, without a systematic approach. While flexible, it lacks the strategic consideration found in Competitive Parity.

Market Share: Market share refers to the percentage of an industry’s sales that a particular company controls. Competitive Parity aims to protect or enhance a company’s market share relative to competitors.
Benchmarking: Benchmarking is a process of comparing business processes and performance metrics to industry bests and best practices from other companies. Competitive Parity is a form of benchmarking in advertising expenditure.
Advertising-to-Sales Ratio: This ratio measures the correlation between advertising expenditure and sales revenue. It’s often used alongside Competitive Parity to assess the effectiveness of advertising spending.

FAQs

Why use Competitive Parity?

Using Competitive Parity helps companies maintain their visibility and competitive stance in the market, ensuring they are not outspent or overshadowed by rivals.

What are the risks of Competitive Parity?

The risks include relying on potentially inaccurate competitor data, neglecting unique and innovative advertising methods, and adopting a more reactive rather than proactive approach.

Can small businesses use Competitive Parity?

Yes, small businesses can use Competitive Parity, but they should consider their unique financial constraints and market position before applying this method.

References

Kotler, P., & Keller, K. L. (2016). Marketing Management. Pearson.
Hollensen, S. (2020). Global Marketing. Pearson.
Belch, G. E., & Belch, M. A. (2018). Advertising and Promotion: An Integrated Marketing Communications Perspective. McGraw-Hill Education.

Summary

Competitive Parity is a budgeting method that aligns a company’s advertising expenditures with those of its competitors. While it offers an approach to maintaining market presence and mitigating risk, it also requires accurate competitor data and may limit innovation. Understanding its advantages and limitations is crucial for balanced and effective advertising strategy.