Our analysis of 518 brands in the pharmaceutical market reveals important insights about budgeting behavior. By formalizing the existing budgeting rules, we developed a model to estimate their impact on the observed product marketing budget decision. This allows us to find empirical support for the application of all three categories of budgeting rules. But the impact on the marketing budget varies significantly across brands. We find that for 81.2% of the brands sales-oriented methods, for 53.2% of the brands competition-oriented methods and
for 40.5% of the brands profit-oriented methods are applied. In summary, managers have a good feeling of the influence of sales on the marketing budget, but they underestimate the impact of competitive marketing spending, while the application of profit-oriented methods is overstated. This finding shows that marketing budgets are generally not based on profit maximization approaches, and therefore also contradicts one of the main assumptions of structural modeling.
To explain the variation in application, we further analyzed the moderating effects which affect the preference for specific budgeting methods. Our results indicate that sales-, as well as profit-oriented methods, are rather applied by dominant firms in the market. Profit-oriented methods additionally dominate in highly competitive markets when an expiring patent status allow for competition which increases the need for sophisticated budgeting. Contrary, competition-oriented methods are preferred in the early stages of the life cycle, i.e. at market entry, when a strong focus on competition may allow to generate awareness and to obtain distribution in the market.
In summary, this study offers a new approach for the analysis of the budgeting process in companies. Our results provide insights into the budgeting process by analyzing how budgeting rules are applied and which moderating effects may influence the application of the rules. This provides managers with a deeper understanding of how budgets are set in companies and they may help to predict the marketing budget of competitors. Further, our results also shed some further light on theory and model development. We find empirical evidence that marketing budget decisions are based on budgeting rules which provide some explanations for prior studies. This indicates that managers set their marketing budgets suboptimal (e.g., Albers, Mantrala and Sridhar 2010). For this reason, assumptions in models regarding budgeting behavior should take these results into account. Structural modeling approaches base on the assumption of profit maximization by practitioners. But our results indicate that this assumption does not hold in general so that the structural modeling approach has to change.
Our study is also subject to limitations. The marketing budget model probably does not include all factors which may have a significant impact on the determination of the marketing budget. But since we control for many factors by our random constant and the error terms and our focus is on the analysis of the application of budgeting rules, we ignore for an exhaustive discussion of determinants of marketing budgets. To identify the influence of these controlled factors may represent an interesting issue for ongoing research. Finally, the estimation results hold for pharmaceutical firms in European markets. It would be interesting to extend the
analysis to other industries and other regions. This is of particular interest as regional impact on budgeting behavior is still unclear (Bigné 1995). Finally, although we analyze the effects of some important variables, such as order of entry, stage in life cycle, market concentration, and patent status, we do not claim they are the only important moderators for the application of budgeting methods. More research should investigate the role of other variables.
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