For Charlton Bates, the president of BatesManor Funiture, there is a two part problem in regards to budgeting for the upcoming year. First, it must be determined how much should be budgeted for overall promotion. Second, it must then be determined exactly how the promotion funds should be allocated. Specifically, these two issues are the most important problems stated in the case because all the details directly or indirectly support this problem statement, and the various deciding parties have not yet come to a consensus regarding this issue. Situation Assessment: Assumptions:
Bott is incorrect in his statement of $3. 975 Million available for the 2008 promotional budget. 2. Since the 2007 sales were reported as $75 Million, the promotional budget for 2007 was below the "5% of sales" limit policy since that would have resulted in promotional expenditures totaling $3. 75 Million instead of the reported $3. 675 Million. 3. BatesManor will not consider selling to retail chains. 4. When Hervey mentioned that cooperative advertising and trade advertising remain at 2007 levels for 2008, this implies $ amounts, and not percentage of budget amounts.
Assuming 3% conservative sales growth for BM's 2008 sales. From a high level industry perspective, household furniture had estimated sales of $31 Billion in the United States in 2007, at manufacturers' prices. This industry is broken down into 3 categories, these are upholstered, wood, and other. These 3 categories make up 50%, 40%, and 10 % of sales, respectively. Therefore, $12. 4 Billion were the sales in 2007 for wood furniture, the specific market in which BatesManor operates (Figure 8).
This market is growing with documented sales growth of 2.5% in 2007 and anticipated growth of 4% for 2008. This would result in $12. 896 Billion being spent on wood furniture over the next year. For BM to achieve a 4% increase in sales, they would then have to capture 0. 6% of the overall wood furniture market (less than 1%). This is considered achievable, and just to ensure BM figures are conservative they are basing all numbers on an assumed 3% sales growth figure for 2008 (Figure 4). Specifically from a company standpoint, BatesManor manufactures medium to high priced wood bedroom, living room, and dining room furniture.
Industry research has shown that the target consumer for BM is most likely from the baby boomer generation (age 40 – 59), and these baby boomers make up 47% of all U. S. households. Based off Exhibit 4 in the case, this range covers the 3 age groups that spend a considerable amount on annual furniture expenditures. In addition to this age range associated with the target customer, there is also a household income portion of $100,000+. Typically, furniture sales are cyclical and related to new housing starts, consumer confidence, and disposable personal income.
The type of household that meets these 2 specifications is at the perfect age and wealth level to replace their old furniture with high quality, long lasting pieces. They are also impacted less by the typical cyclical nature of the furniture industry due to their accumulated wealth. This explains why the target customer would purchase BatesManor quality furniture. Charlton Bates himself said "Galleries and upscale furniture and department stores attract and serve our target customer, the 40-59 year old homeowner with an annual household income over $100,000.
That's where our customers get ideas and buy the quality furniture we sell" Building off of this, where the target customer buys their furniture and how they get their ideas is extremely important. Based off exhibit 5 in the case, the largest percentage of people in the target demographic get their ideas from gallery stores (Figure 14). Additionally, when it comes to purchasing, the percentage of people buying at gallery stores is second only to furniture stores, (51% vs. 45%). Also, gallery stores are expected to grow from 11,000 to 12,500 stores nationwide by 2007, almost a 14% increase in one year's time.
Galleries and upscale furniture/department stores are appropriately geared to BM's Target Customer (The 40 – 59 yr old homeowner, w/ $100,000+ income) because galleries supply these potential customers with both ideas and quality furniture. This provides all the incentive needed to convince BatesManor to not only increase their presence in gallery stores, but also to increase their offerings within these stores. Currently, BM sells its furniture though 1,000 department stores and independent furniture specialty stores. However, all stores do not carry the company's entire line so this is certainly an opportunity for BM.
Based on the fact that they have a company sales force, which is atypical in this industry, BM is positioned well to increase their presence within gallery stores. Dealing with organizational capacity, BatesManor has an internal strength by having their own sales force as opposed to independent reps. Trained, knowledgeable people who aren't surviving on commission to feed their families are perfectly suited to advise and educate potential purchasers on the benefits of quality BatesManor furniture in a relaxed, no pressure atmosphere.
This is also essential since one of the most important factors when selecting furniture, as found in the Better Homes and Gardens consumer panel report, was that "99% want sales the rep to show alternatives, answer my questions, and let me alone to think/browse". Figure 12 also shows the need for education on furniture amongst potential consumers. Therefore, BatesManor needs to capitalize on their well-trained sales force and expand their presence in gallery stores.
To summarize up to this point, BM's target customer has been defined (40-59 yr old homeowner w/ $100,000+ income), along with why/when they buy (seek quality, purchase somewhat cyclically), where they get their ideas (galleries and magazines mostly), and ultimately where they make their end purchase (varying furniture stores/galleries). Now, BM's advertising strategy needs to be aligned more appropriately with these findings. As far as their communication mix budgeting, a "percentage-of-sales approach" has been adopted by BM.
The company cannot yet adopt an "objective-task approach" since it is currently difficult to apply. However, with improved monitoring and controlling, this may be a possibility when 2009 budgeting comes around. With a lower CM this year, the "all available funds" approach was not considered. A typical pulse strategy is to be employed; therefore BM will periodically concentrate its advertising but will also attempt to maintain some sense of continuity that is neglected by a blitz strategy. From a "push" perspective, BM can educate retail salespeople and gain space to exhibit their full line.
From a "pull" perspective, BM should continue improve brand awareness, brand knowledge, and image (in line with what Hervey proposed). When it comes to more appropriately aligning their 2008 budget with the corresponding sales benefit of those expenditures, it's a good idea to first evaluate the previous year's figures. Currently, 2007 figures show cooperative advertising accounted for 44. 9% of total promotion dollars. (Figure 7) However, monitoring and controlling measures are not currently in place to measure the benefit of such a high amount. More information around this would be a "nice to have" to investigate the case further.
(In the real world, you would document current procedures and then see if these are properly tracking to the company's goals and objectives. If not, new ones will need to be introduced to accomplish this. ) Cooperative advertising is still needed because 85% read furniture ads before they actually need furniture, but the budget should be reduced slightly to make it more in line with the cost benefit analysis for 2008 (Figure 4). Also, both the VP of Sales and the advertising agency are in agreement with the importance of increasing sales expenses and consumer advertising.
Based on the fact that Better Homes and Gardens noted 95% of subscribers say they get their redecorating tips from magazines, then consumer advertising in the form of shelter magazines should be allocated more than just 15. 3% of promotional dollars (Figure 7). Shelter magazines enable BatesManor to direct the proper communication to the proper individual at the proper time. Trade advertising is important since retail buyers view manufacturers' lines and often make buying commitments for their stores. In response to this, a slight increase in trade advertising is proposed.
Promotional web sites were considered, but are on hold at this time until more marketing information is available. BM will not invest in a transactional web site due to the nature of their industry. For sales expense and administration, 27% of the 2007 budget was devoted to this advertising group. Although this seems like an adequate amount, it was noted that BateManor's experience showed that sales efforts in retail stores by company reps accounted for as much as 1/2 of the company sales in any given year.
The sales expense group needs to be allotted a larger percentage of promo funds, and both Hervey and the VP of Sales agree with this. Based on attempting to align promotional dollars more closely with their actual contribution to sales, multiple break even analyses have been calculated (Figures 1-3).
Even based on a conservative sales growth of 3%, the highest break even amount called for $1. 86 Million in sales. This is easily covered with the conservative 3% sales growth figure, which equates to an increased amount of $2.25 Million for sales in 2008. If BatesManor surpasses the expected 3% growth in sales, their profits will be better than anticipated. Overall, BatesManor needs to devote more of their total promo dollars to sales expense and consumer advertising while focusing on increasing their presence in gallery stores. This proposal is consistent among BatesManor's team and with other marketing mix elements, quantifiable for measurement and control purposes, and attainable with appropriate amount of effort and expenditure.