Budget Decisions

Major Decisions in Advertising

Budget Decisions Establishing the budget Budgeting approaches Allocating the budget

Establishing the budget Marginal Analysis Sales response models Additional factors in budget setting

Marginal Analysis Advertising / Promotion in $ Sales in $ Point A Profit Sales Gross Margin Ad. Expenditure

BASIC Principles of Marginal Analysis Increase Increase Spending... IF: The increased cost is less than the incremental (marginal) return. Decrease Decrease Spending... IF: The increased cost is more than the incremental (marginal) return. Hold Hold Spending Level... IF: The increased cost is equal to the incremental (marginal) return.

Problems with Marginal Analysis Assume that sales are a direct measure of advertising and promotional efforts. Assume that sales are determined solely by advertising and promotion.

Advertising Sales/Response Functions Sales Advertising Expenditures A.Concave- Downward Response Curve Sales Advertising Expenditures Range ARange BRange C B.S-Shaped Response Function High Spending Little Effect Initial Spending Little Effect Middle Level High Effect

Factors Influencing Advertising Budgets

Factors Considered in Budget Setting Source: The Advertising Age Editorial Sounding Board consists of 92 executives of the top 200 advertising companies in the United States (representing the client side) and 130 executives of the 200 largest advertising agencies and 11 advertising consultants (representing the agency side).

Budgeting Approaches Top-down budgeting Bottom-up budgeting

Top-Down Budgeting Top Management Sets the Spending Limit The Promotion Budget Is Set to Stay Within the Spending Limit

Top-Down Budgeting Arbitrary allocation The affordable method Historical Method Percentage of Sales Competitive parity Return on investment (ROI)

The Affordable Method It is used when a company allocates whatever is left over to advertising. It is common among small firms and certain non-marketing-driven large firms. Companies using this approach don’t value advertising as a strategic imperative. Logic: we can’t be hurt with this method. Weakness: it often does not allocate enough money.

Historical Method Historical information is the source for this common budgeting method. The inflation rate and other marketplace factors can be used to adjust the advertising amount. This method, though easy to calculate, has little to do with reaching advertising objectives.

Percentage-of-Sales Method It compares the total sales with the total advertising budget during the previous year or the average of several years to compute a percentage. Two steps Step 1: past advertising dollars/past sales = % of sales. Step 2: % of sales X next year’s sales forecast = new advertising budget.

Percentage-of-Sales Method Based on (future or past) sales dollar or unit product cost Method 1: Straight Percentage of Sales 2007Total dollar sales Straight % of sales at 10% $1,000,000 $100, Advertising budget$100,000 Method 2: Percentage of Unit Cost 2007Cost per bottle to manufacturer Unit cost allocated to advertising $4 $1 2008Forecasted sales, 100,000 units 2008Advertising budget (100,000*$1)$100,000

不同產業之廣告營收比、廣告利 潤比與年增率

不同產業之廣告營收比、廣告利 潤比與年增率

Percentage-of-Sales Method Pros Financially safe Reasonable limits Stable

Percentage-of-Sales Method Cons Reverse the cause-and-effect relationship between advertising and sales. Stable? Misallocation Difficult to employ for new product introductions. Sales↓ → Advertising budget↓

Competitive-Parity Method This method uses competitors’ budgets as benchmarks and relates the amount invested in advertising to the product’s share of market. Logic: share of media voice → share of consumer mind → share of market. Share of media voice: the advertiser’s media presence. The actual relationship above depends to a great extent on factors such as the creativity of the message and the amount of clutter in the marketplace.

Competitors’ Advertising Outlays Do Not Always Hurt

Competitive-Parity Method Pros Take advantage of the collective wisdom of the industry Spending what competitors spend helps prevent promotion wars. Cons Companies differ greatly. There is no evidence that budgets based on competitive parity prevent promotion wars. (Prisoners’ Dilemma)

Return on Investment (ROI) In this method, advertising and promotions are considered investment, like plant and equipment. Thus, the budgetary appropriation leads to certain returns. ROI has received a great deal of attention by practitioners over the past few years, with many still disagreeing as to how it should be measured. Figure 7-18 While the ROI method looks good on paper, the reality is that it is rarely possible to assess the returns provided by the promotional effort – at least as long as sales continue to be the basis for evaluation.