Advertising Budgeting

Professor Close

Sources: Cravens and Percy(1998); Murphy, Cunningham and de Lewis

(2011)

We will discuss these topics of Advertising Budgeting:

1.Why Crucial

2. The 3 Budgeting Methods

3. Trends in Ad Budgeting

*Note, please refer to advertising as INVESTING, not spending, in

our class and in your briefs…why do I say that?

1. Budget is Crucial to Ad

StrategyTarget Audience

Advertising Objectives

****Advertising Budget****

Creative Strategy

Advertising Media and Programming Schedules

Implement and Evaluate Strategy Effectiveness

So, Why is ad or IBP budgeting crucial?

•Frankly, a company’s success is a function of its growth in sales and profits•What fuels that growth? ADVERTISING and MARKETING•This, in turn, sparks WOM (and this can be free!)•The economy has ups and downs, as do specific industries (Note: the soft drink industry dropped 4% in 2008 when our economy started hurting—so Pepsi invested $1.2 BILLION 2008-2011 in a marketing overhaul)•THINK…..Is this common sense? Would you advertise more, status quo, or less when times are tough?

WOM$

PublicRelations

Direct Marketing

SalesPromotion

PersonalSelling

Advertising: TV, Radio,

Outdoor, Print

New Media

Tough Times? So,Re-Allocate to lesser

InvestmentsWhich are relatively smaller

investments?

Event Marketing

Your CEO asks you to propose an ad budget.

How would you calculate

the ad budget?

Why would you pick this method?

2. Three Ad/IBP Budget Methods

(I don’t even want to mention the 4th…)

Budgeting Method #1a~The Percentage of Past Sales Method

A2 = ƒ (S1)

Where:A2 is the total ad budget for NEXT year (year 2 or quarter 2)

ƒis a percentage figure(see NAA industry norms)

S1 is sales for period 1 (or last year’s sales)

Budgeting Method #1b~The Percentage of Forecasted Future Sales Method

A2 = ƒ (S2)

Where:A2 is the total ad budget for NEXT year (year 2 or quarter 2)

ƒ is a percentage figure(see NAA industry norms)

S1 is sales for period 1 (or last year’s sales)

• Fixed percent of sales, often based on past expenditure patterns.

• Relatively simple (if you have the information)

• You must calculate ad allocations as a fixed percentage of PAST SALES

(e.g., last years’ sales)

• Can help with franchising.

• Note: Peckham’s Formula: for new products, set S.O.V. @ 1.5 times your desired market share two years out

Arbitrary. Budget may be too high

when sales are high. Budget may be too low

when sales are low.• Ignores long-term effects

• You need benchmarks.• You need advertising to

sales ratios for the industry (note these are computed each year by pro. Ad organizations)

• Industries vary a lot (e.g., malt beverages invest 10% of annual sales on advertising; movie theatres are closer to just 1% industry average)

• Note: about 3% is an average ad 2 sales ratio

Features Drawbacks

Budgeting Method #1~Percentage of

Sales

Budgeting Method #2~Competitive-Parity Method

(I call it the market share approach…)

ASV = (AF) ______

Ac + AF

Where:ASV is the firm’s advertising share of voice (S.O.V) (anyone care to remind us what S.O.V is?)

AF is the firm’s advertising expenditures for the period in question

Ac is all competitors’ advertising expenditures for the period in question

At least, think about a competitive analysis

LV

LV increased advertising 20% in 2003―spends just 5% of revenues on advertising―half the industry average

Cravens and Percy 1998 cited *Business Week, March 22, 2004, 98-102.

Brand 2003 Sales

Billions

Percent

Change*

Operating

Margin

Louis Vuitton $3.80 +16% 45.0%

Prada 1.95 0.0 13.0

Gucci** 1.85 -1.0 27.0

Hermés 1.57 +7.7 25.4

Coach 1.20 +34.0 29.9

*At constant rate of exchange **Gucci division of Gucci Group Data: Company reports. BW

Features Drawbacks

Budgeting Method #2~Competitive-

Parity

Budgeting Method #3~Objective and

Task

A = ƒ (objectives)Where:A is advertising investment(the firm’s advertising expenditures for the period in question)

Objectives are things that you want to achieve in said time period (awareness, trial use, etc.)

Link Objectives to Budget

Need Recognition

Finding Buyers

Brand Building

Evaluation of Alternatives

Decision to Purchase

Customer Retention

…Others?

Features Drawbacks

Budgeting Method #3~Objective and Task

Percentage of Sales Fixed percent of sales,

often based on past expenditure patterns.

Can help with franchising.

Comparative- Parity Budget is based largely

upon what competition is doing.

Objective and Task Set objectives and then

determine tasks (and costs) necessary to meet the objectives.

Percentage of Sales Arbitrary. Budget may be too high

when sales are high Budget may be too low

when sales are low.

Comparative- Parity Differences in marketing

strategy may require different budget levels.

Objective and Task The major issue in using

this method is deciding the right objectives so measurement of results is important.

Features Drawbacks

Budgeting Method Recap

(Cravens and Percy and Murphy, Cunningham and de Lewis)

Whichever method you choose, budgets

vary due to:

Target Market(s)

Desired Positioning

Role of Promotion in Positioning

Product Characteristics

Stage of Life Cycle

Situation Specific Factors (examples?)

Which ad or IBP budget method is generally a best

bet?

Percent of Sales

(note: Future or

past)

Competitive-Parity

Objective and Task

All You Can Afford

(note: this is not a

good idea usually…

Proceed with

caution.

Budgeting Methods

Ad/IBP Budgeting

I would argue for Objective and Task,

because of the logic and the strategic approach

with long-term appropriation and

flexibility.

Media/ Scheduling

Creative Strategy

Budget Allocation

3. Recent Trends in Ad/IBP Budgeting

Decisions• More Promotions/Less Ads

• International Markets mean more competition and harder to measure

market share

• Clutter. Clutter. Clutter.

• Signaling Theory

• Short-term pressure to brand managers

• Less umbrella branding strategy (more narrow)

• Advocacy ads

• CSR movement

• Green movement

• Online ads a 25$ BILLION a year industry (young, mobile, and

measurable)

• Experiential/Event Marketing gaining prominence

Approx. Annual Expenditures

(billions)

0

$200

$400

$600 Personal Selling

Sales Promotion

Event Marketing

Advertising