ESTABLISHING AND ALLOCATING THE PROMOTIONAL

BUDGET

SNEAK-PEEK

While establishing objectives is important, the limitations of the budget also need attention.

Since no organization has unlimited budget, so objectives must be set with the budget in mind.

We focus on two primary decisions :

1. Establishing a budget amount

2. Allocating the Budget

SNEAK-PEEK

One of the major decisions to be taken:

HOW MUCH TO SPEND?

• The value of advertising must be realized…

• Advertising is not an expense but is an Investment

• While budgeting is a critical decision, it has perhaps been the most resistant to change.

ESTABLISHING THE BUDGET

Advertisers use an approach called

Contribution margin, the difference between the Total Revenue generated by the brand and its Total Variable costs.

• Most of the models used to establish Advt. Budget can be categorized as taking an economic or sales response perspective.

Theoretical Issues in Budget Setting

MARGINAL ANALYSIS

Though Marginal analysis seems Logical intuitively, but it has weaknesses,1.Sales are direct result of advt. and sales

expenditure and this effect can be measured.2.Advertising and sales are solely responsible for

sales.

David Aaker and James Carman, “ Looking for the relationship between Advertising

and Sales is somewhat worse that looking for a needle in a haystack.”

• But sales are not the only goal of Advertising, Awareness, interest, attitude change, and other communications objectives are often sought while the bottom line may still be to sell the product.

• Marginal analysis is seldom used as a basis for budgeting (except for direct-response advertising).

Almost all advertisers adapt to one of the two models of the Advertising/sales response function:

1. Concave Downward function or

2.S -shaped response Curve

SALES RESPONSE MODELS

• The logic is that those with the greatest potential to buy will likely act on the first (or earliest) exposures, while those less likely to buy are not likely to change as a result of the advertising.

• Thus, according to the concave-downward function model, the effects of advertising quickly begin to diminish.

• Budgeting under this model suggests that fewer advertising dollars may be needed to create the optimal influence on sales.

Concave downward function

Concave downward function

S-Shaped response function

1. Product Factors

2. Market factors- Stage of PLC, Market share, Competition Etc.

3. Customer Factors

4. Strategy Factors - regional Markets, early stage of Brand Life cycle, long channels of distribution

5. Costs

Factors influencing Advertising Budgets

1. Changes in Advertising strategy and/or Creative approach

2. Competitive activity and/or spending levels

3. Profit contribution goal or other financial target

4. Level of previous year’s spending with adjustments

5. Senior management allocate budget or set limit

6. Volume share projection

7. Media cost increases

8. Modification in media strategy or buying techniques

Top Factors: Agency perspective

First, there are two things to lookout for 1.Many firms employ more than one method2.Budgeting approaches vary according to the size

and sophistication of the firm

We analyze two approaches:1.Top-Down Budgeting 2.Bottom-Up Budgeting

BUDGETING APPROACHES

TOP-DOWN APPROACH:

A budgetary amount is established(usually at the executive level) and then the monies are passed down to the various departments.

These Budgets are predetermined and have no true theoretical bases.

Top-Down Budgeting

Top-Down Budgeting

Top Management sets the spending limits

Advertising/Promotional programs are planned within

the spending limits

Top-Down Budgeting methods include:1.Affordable method2.Arbitrary Allocation3.Percentage of sales 4.Competitive parity 5.Return on Investment

Top-Down Budgeting

THE AFFORDABLE METHOD• Often referred to as “All-You-Can –Afford method” The firm determines the amount to be spent on various

areas such as production and operation. Then it allocates the remaining amount for advertising and promotion, considering that is what they can afford. The task to be performed by the advertising/promotions function is not considered, and the likelihood of under- or overspending is high, as no guidelines for measuring the effects of various budgets are established.

• Most common among small firms unfortunately also used by few large firms by those which are not marketing driven. (EX-Most High-tech firms)

• Is a sort of Risk-free approach as no financial problems will occur and is true in accounting sense but does not reflect sound managerial decision according to marketing perspective.

• This approach does not allocate enough money to get the product off-the ground and into the market.

• It will eventually lead to budget cuts at time when budget needs to be increased.

Arbitrary Allocation • In this method the budget is determined by

management solely on the basis of what is felt to be necessary.

• Budget depends largely upon Managers’ psychological profile.

• Commonly used in small firms Non-profit orgns.• No systematic thinking, No objectives, No concept

and purpose of Advertising and promotion.• But still it continues be used, we discuss this

approach to point out that it is used- not recommended

Percentage of sales method Is one of the most common methods used in most

large firms for budget setting in which the budget is set on the bases of sales of the product.

• Management determines the amount of budget by1.Taking a percentage of the sales dollars2.Assigning a fixed amount of the unit product cost to

promotion and multiplying this amount to the number of units sold.

Method 1: Straight percentage of sales method

2005 Total rupees sales 10,00,000

Straight percentage of sales 10% 1,00,000

2006 Advt. budget 1,00,000

Percentage of sales method

Percentage of sales method • Method 2: Percentage of unit cost

2005 cost per bottle to manufacture: 6 Rs.

Unit cost allocated to advt. 1.50 Rs.

2006 forecasted sales 1,00,000

2006 Advt. budget(1.50 X 1,00,000) 1,50,000

Advantages • since we use future sales as a base. The

resulting budget is more likely to reflect current conditions and be more appropriate.

• It is financially safe and keeps ad spending within reasonable limits, as it bases spending on the past year’s sales.

• There will always be sufficient monies to cover the budget, with increases in sales leading to budget increases and sales decreases resulting in advertising decreases.

• The percentage-of-sales method is simple, straightforward, and easy to implement.

• Finally, this budgeting approach is generally stable.

Disadvantages• Letting sales determine the budget is a risk.• It treats advertising as an expense associated with

making a sale rather than an investment.• A second problem with this approach was actually

cited as an advantage earlier: stability. The problem is that this method does not allow for changes in strategy either internally or from competitors.

• The percentage-of-sales method of budgeting may result in severe misappropriation of funds.

• The percentage-of-sales method is also difficult to employ for new product introductions.

• Finally, if the budget is contingent on sales, decreases in sales will lead to decreases in budgets when they most need to be increased.Continuing to cut the advertising and promotion budgets may just add impetus to the downward sales trend.

• While the percentage-of-future-sales method has been proposed as a remedy for some of the problems discussed here, the reality is that problems with forecasting, cyclical growth, and uncontrollable factors limit its effectiveness.

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Competitive Parity

• In the competitive parity method, managers establish budget amounts by matching the competition’s percentage-of-sales expenditures.

• Companies that provide competitive advertising information, trade associations, and other advertising industry periodicals are sources for competitors’ expenditures.

• Competitive Media Reporting• Clipping service

Advantages• Setting budgets in this fashion takes advantage of

the collective wisdom of the industry.• It also takes the competition into consideration.• It ignores the importance of accomplish specific

objectives or addressing certain problems and opportunities.

• Programs may not be equally effective, neglects contribution of creative execution and media allocations, and success or failure of various programs.