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 Strategy Target 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 companys 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 hurtingso Pepsi invested $1.2 BILLION in a marketing overhaul) THINK…..Is this common sense? Would you advertise more, status quo, or less when times are tough?

WOM$ Public Relations Direct Marketing Sales Promotion Personal Selling Advertising : TV, Radio, Outdoor, Print New Media Tough Times? So, Re-Allocate to lesser Investments Which 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 dont even want to mention the 4 th …) Budgeting Method #1a~The Percentage of Past Sales Method A 2 = ƒ (S 1 ) Where: A 2 is the total ad budget for NEXT year (year 2 or quarter 2) ƒis a percentage figure (see NAA industry norms) S 1 is sales for period 1 (or last years sales)

Budgeting Method #1b~The Percentage of Forecasted Future Sales Method A 2 = ƒ (S 2 ) Where: A 2 is the total ad budget for NEXT year (year 2 or quarter 2) ƒ is a percentage figure (see NAA industry norms) S 1 is sales for period 1 (or last years 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: Peckhams Formula: for new products, set 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 FeaturesDrawbacks Budgeting Method #1~Percentage of Sales

Budgeting Method #2~Competitive-Parity Method (I call it the market share approach…) A SV = (A F ) ______ A c + A F Where: A SV is the firms advertising share of voice (S.O.V) (anyone care to remind us what S.O.V is?) A F is the firms advertising expenditures for the period in question A c 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 advertisinghalf the industry average Cravens and Percy 1998 cited *Business Week, March 22, 2004, Brand2003 Sales Billions Percent Change* Operating Margin Louis Vuitton$ %45.0% Prada Gucci** Hermés Coach *At constant rate of exchange **Gucci division of Gucci Group Data: Company reports. BW

FeaturesDrawbacks Budgeting Method #2~Competitive-Parity

Budgeting Method #3~Objective and Task A = ƒ (objectives) Where: A is advertising investment (the firms 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?

FeaturesDrawbacks 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. FeaturesDrawbacks 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