Budget Setting

8/3/2019 Budget Setting

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BUDGET SETTINGS

MONEY TALKS


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No, theres no formula

But there is a procedure

Budget setting process starts with definition ofthe market one is operating in

e.g. Is Iodex in the balm market or the market

for pain relievers (including pills) ?


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The broader the market we compete in, the

larger the advertising budget

e.g. Advertising to women only may cost less

than reaching all adults

Targeting only Metros / State Capitals costs

less than national plan


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How important is advertising ?

Does it play a major part in determining

sales / market share ?

OR

Is it a relatively small part of the marketing

mix ?


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What is the current

market situation ?

Evaluate requirements compared to

competition

Market leader can maintain shares by spending

less than competitors

Minor brands must spend proportionately more

than higher placed brands


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Method of Budget Setting

Affordable

Inertia

Media Inflation Multiplier

A to S / A to M ratio

Matching Competition

SOV v/s SOM

Dynamic Difference

Objective and Task

Experiments

Modeling


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The Affordable method Ad budget = Revenue - Other costs

Shake the budget and take whats loose


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Pros :

Ad budget affordable

No major items of total budget threatened

Cons :

No account taken of ads effect on sales or of

changes in environment


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The Inertia Method

If it aint broke, dont fix it

Maintain last years budget; even if budget

changed, some aspect of the plan remains

the same, e.g. GRPs


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Pros :

Simplicity

If advtg. Is working, likely to do so next year also

Cons :

If inflation ignored, leads to steadily reducing

effects

Company objectives advtg. effects and changes in

environment not taken into account


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Media Inflation Multiplier

Often used in combination with Inertia Method

A budget agreed to up to a point multiplier by

the estimated increase in media costs

Multiplier can be rate of inflation in CPT or

can be calculated on the basis of last years

schedule being costed at this years rates(thereby maintaining GRPs)


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Pros :

If effects of advertising have been good, these get

repeated as the weight is maintained

Cons : Removes incentive to improve efficiency in other

ways such as negotiation or re-evaluation of

vehicles on the basis of cost efficiency


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Advertising to Sales (A/S)

Ad budget expressed as percentage of sales

revenue (targeted or past sales )


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Pros :

Easy to use

Successful brands get more support

Accounts for change in selling price

Cons :

A sale maintenance strategy

Advtg. becomes result of sales rather than cause

Superior products get better, weaker ones remain

weak


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A/S for leading brands

Sunsilk 3.9

Lux 2.6

Colgate 4.6

Red Label 3.0Complan 8.4

DFT 0.5

%


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A/S for leading companies

Hindustan Lever 3.2

ITC 0.9

Nestle 5.2

Godrej Soaps 5.8

Broke Bond 3.4P&G 13.5

Colgate Palmolive 4.2

Bausch & Lomb 22.7

%


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Matching Competition

Copy competitors in terms of ad spends orA/S ratios or GRPs

This becomes task against which budget is set


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Pros :

Easy to use

Easily defended to top mgmt Directs attention to competitors ad activities

Cons :Assumes competitors spending right amount

Ignores effects of advtg. On sales

Hard to forecast competitors spend levels


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SOV v/s SOM

Expresses ad budget as share of category

spend and examines its relationship with

market share

Size of brand strongly associated with

difference between SOV and SOM; large

brands can spend proportionately less


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Pros :

Positions ad budget competitively

Allows brand to react to competitive changes in

environment

Places realistic perspective on advertising

expectations

Cons :

Assumes direct relationship between SOV / SOM

Does not account for chance factor


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John Philip Jones

Data about brands in 23 countries collected;

all brands in packaged goods categories

At least 4 advertised brands per category -

near oligopoly conditions

666 brands in 117 categories considered


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John Philip Jones

Brands grouped into families covering 3 percentage

points of market share

For each brand, difference between SOV and SOM

calculated and averaged within brand family

For small brands, SOV >> SOM

For large brands, SOV 5% or more below their SOM


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Advertising-Intensiveness Curve

Advertising-Intensive Curve

-6

-4

-2

0

2

4

6

Share of Market (%age)

SOVaboveorbelowSOM

(p

ercentagepoints)


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Dynamic Difference

Based on historical data on SOV and SOM

Y : SOM this year - SOM last year

X : SOV this year - SOM last year

(dynamic difference)

Mark these on scatter plot


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(20) (15) (10) (5) (0) 5 10

SOV 1 - SOM 0 %

2

1

0

(1)

(2)

(3)

SOM 1 - SOM0

TEN YEARS DATA


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Dynamic Difference

To note :

Point above Y- axis (increasing SOM) ?

Points to right of X - axis (SOV > SOM) ?

Strong association of Dynamic Difference with

increase in SOM ?

Possible to draw upward sloping line throughthe points ?


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Dynamic Difference

General trends established; exceptional

points can be probed further

Can be used to determine next years SOV

level basis projected SOM


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Objective and Task Method

Marketing and advertising objectives

starting pointDefine task to be done in accomplishing

these objectives

Cost of task is budget to be set JWT Frequency Estimators is a tool used to

determine the magnitude of the task


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Pros :

Budget for specific goals

Advtg. Seen as result-oriented

Encourages campaign evaluation

Cons :

Method may ignore affordability

Goal set partly because it is measurable, partly

because we hope that achieving the task will meet

the objective. We may be wrong


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Effective Frequency

Three key factors

In the target group

What is the frequency required for the

marketing task?

What should be the time period?


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Effective Frequency :

A Budgeting Tool

The process

Define target group

Define campaign objectives

Set effective frequency targets

Set effective reach targets/ cross check against

competitionArrive at advertising weights

Translate advertising weights to SOV and cross

check against competition


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Time Period

For FMCG freqoently purchased brands,

purchase cycle weekly or monthly

For other categories, over a longer period of

time


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Special Cases

New product - No historical data; methods

such as Inertia, Media Inflation Multiplier,Dynamic Difference not applicable


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New Products

Methods

Fixed amount based on in-company norms or

other launches

Match budget / GRP levels

Experiments

AffordabilityPeckhams Method


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Peckhams Formula

Estimate SOM at end of year 2

Set budget so that Avg SOV over Years 1,2

is at least twice the estimated SOM

Ratios less than 2 for distinctive, first-in-

category products

Ratio higher for undifferentiated brands-


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Special Cases

Budget allocation for portfolio of brands

Elasticity of each brands to advertising

Else, rank brand basis Unit / Adspends

Brand with highest rank gets greater proportion of budget


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Modelling

Based on historical data

Sales / SOM regressed against Adspend,SOV, Price, Promotions, etc.

This gives a multi-variate equation

Weakness

collection of reliable data


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Experiments

Keeping other factors constant, alter advtg,

weight deliberately in one market

Examine changes in SOM and brand recall

vis--vis a matched market


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Budget Setting : JWT Approach

Pragmatic

Not based on any one method

Establishing a baseline to suit circumstances


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JWT 5 Point Plan

Establish a baseline

What is the norm for the brand ?

Modify the baseline

Use past experience / expectation

What range of budgets emerge ?

What are the likely results of each alternative ?

SOM / Sales / Profits / Contribution

How can we get better evidence for next year


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Establish a baseline

Brand operates in stable environment

use previous expenditures as baselines

Brand is new / past expenditure misleading

use competitors spend relative to SOM

Totally new type of product

use other new brand launches in similar

markets


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Modify the baseline

Internal Factors :

Strategy

Market share objective

New users of the brands

Investing / maintenance / milking

Brand

Functional change Perceived value

Priorities

Aggressive / defensive


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Modify the baseline

External Factors :

The market

More / less competitionLikely developments

The media

Media rates / relative valueNew media

Media events

e.g. Olympics, World Cup


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Practical Approach

Work out the budget required based on

different methods

Compare and decide on the spend


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What range of budgets emerge ? Whats affordable

SOV v/s SOM

A to S Ratio

Objective and Task


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Thank You

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Budget Setting

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