Objective Setting and Budgeting CHAPTER 6 Objective Setting and Budgeting © 2010 South-Western, a part of Cengage Learning All rights reserved.

Chapter Objectives After reading this chapter you should be able to: Understand the process of marcom objective setting and the requirements for good objectives. Appreciate the hierarchy-of-effects model and its relevance for setting marcom objectives. Comprehend the role of sales as a marcom objective and the logic of vaguely right versus precisely wrong thinking. Know the relation between a brand’s share of market (SOM) and its share of voice (SOV) and the implications for setting an advertising budget. Understand the various rules of thumb, or heuristics, that guide practical budgeting. © 2010 South-Western, a part of Cengage Learning. All rights reserved. 6–2

Setting Marcom Objectives Goals that the various marcom elements aspire to achieve individually or collectively during a scope of time such as a business quarter or fiscal year Setting Marcom Objectives Is an expression of management consensus Guides the budgeting, message, and media aspects of advertising strategy Provides standards against which results can be measured © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Marcom Objectives and Tools Marcom Tool Facilitate the successful introduction of new brands Brand naming and packaging, advertising, sales promotions, word-of-mouth buzz generation, and point-of-purchase (P-O-P) displays Build sales of existing brands by increasing the frequency of use, the variety of uses, or the quantity purchased Advertising and sales promotions Inform the trade (wholesalers, agents or brokers, and retailers) and consumers about brand improvements Personal selling and trade-oriented advertising Create brand awareness Advertising, packaging, and P-O-P messages). Enhance a brand’s image Brand naming and packaging, advertising, event sponsorship, cause-oriented marketing, and marketing-oriented public relations Generate sales leads Advertising © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Marcom Objectives and Tools (cont’d) Marcom Tool Persuade the trade to handle the manufacturer’s brands Trade-oriented advertising and personal selling Stimulate point-of-purchase sales Brand naming and packaging, P-O-P messages, and external store signage Increase customer loyalty Advertising and sales promotions Improve corporate relations with special interest groups Marketing-oriented PR Offset bad publicity about a brand or generate good publicity Counter competitors’ communications efforts Provide customers with reasons for buying immediately instead of delaying a purchase © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Hierarchy of Marcom Effects Figure 6.1 Hierarchy of Marcom Effects The hierarchy of effects metaphor implies that for marketing communications to be successful it must move consumers from one goal to the next goal. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Hierarchy of Marcom Effects Advancing Consumers from Unawareness to Awareness Advertising is the most effective and efficient method for quickly creating brand awareness. Creating an Expectation Product benefits from buying and experiencing a brand Encouraging Trial Purchases Free samples, coupons, major price discounts and rebate offers encourage trial behaviors © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Hierarchy of Marcom Effects (cont’d) Forming Beliefs and Attitudes Beliefs form the basis for developing an overall attitude toward the brand. Beliefs and attitudes are mutually reinforcing Reinforcing Beliefs and Attitudes Marcom serves to reinforce consumer beliefs and attitudes based on product usage experience Accomplishing Brand Loyalty Brands that continue to satisfy expectations foster brand-loyalty which reduces price sensitivity © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Advertisement Illustrating Hierarchy of Marcom Effects Figure 6.2 Advertisement Illustrating Hierarchy of Marcom Effects © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Criteria That Good Marcom Objectives Must Satisfy Figure 6.3 Criteria That Good Marcom Objectives Must Satisfy © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Should Marcom Objectives Be Stated in Terms of Sales? Objectives of Presales Communication To increase the target audience’s brand awareness To enhance the target ir attitudes toward the brand To shift their preferences from the competitors’ brand Sales Objectives The marcom objective literally is to increase sales by a particular amount. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Logic of Vaguely Right versus Precisely Wrong Thinking Figure 6.4 The Logic of Vaguely Right versus Precisely Wrong Thinking © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Should Marcom Objectives Be Stated in Terms of Sales? The Traditional View (Thesis) Using sales response as the objective for a branded product’s marcom effort is unsuitable for two reasons: A host of factors (e.g., advertising, sales promotions, and other elements of the marcom program) can affect sales. Marcom’s effect on sales is typically delayed, or lagged. The Heretical View (Antithesis) Marcom objectives should always be stated in terms of sales or market share gains and that failure to do so is a cop-out Marcom’s purpose is to generate sales. Accountability Perspective (Synthesis) Companies and their chief executives and financial officers are demanding greater accountability from marcom programs Efforts should not also be made to assess whether marcom affects pre-sales goals. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Marcom Budgeting Budgeting in Theory The best (optimal) level of any investment is the level that maximizes profits Marginal revenue = Marginal cost, MR=MC Marginal Cost = Change in total cost = TC Change in quantity Q Marginal Revenue = Change in total revenue = TR Change in quantity Q Advertisers should increase their advertising investment as long as it is profitable to do so © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Marcom Budgeting Sales-to-Advertising Response Function The relationship between money invested in advertising and the response, or output, of that investment in terms of revenue generated © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Hypothetical Sales-to-Advertising Response Function Table 6.1 Hypothetical Sales-to-Advertising Response Function © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Budgeting in Practice Percentage-of-Sales Budgeting Brand advertising budget is a fixed percentage of past (e.g., last year’s) or anticipated (e.g., next year’s) sales volume. Criticism: budget becomes a function of sales Sales = ƒ(Advertising) versus Advertising = ƒ(Sales) Objective-and-Task Budgeting Advertising decision makers specify what role they expect advertising (or some other marcom element) to play for a brand and then set the budget accordingly. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Budgeting in Practice (cont’d) Percentage-of-Sales Budgeting Brand advertising budget is a fixed percentage of past (e.g., last year’s) or anticipated (e.g., next year’s) sales volume. Criticism: budget becomes a function of sales Sales = ƒ(Advertising) versus Advertising = ƒ(Sales) Objective-and-Task Budgeting Advertising decision makers specify what role they expect advertising (or some other marcom element) to play for a brand and then set the budget accordingly. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Steps in Objective-and-Task Budgeting Establish specific marketing objectives to be accomplished Assess communication functions required to accomplish overall marketing objectives Determine advertising’s role in the total communication mix Establish specific measurable communication response level goals required to achieve marketing objectives. Establish the budget based on estimates of expenditures required to accomplish the advertising goals. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Budgeting in Practice (cont’d) Competitive Parity Method Budgeting Setting the marcom budget to match or exceed what competitors are doing Share of Market (SOM) The ratio of one brand’s revenue to total category revenue Share of Voice (SOV) The ratio of a brand’s advertising expenditures to total category advertising expenditures © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Choosing Marcom Pathways Encoding Variability Hypothesis Contends that people’s memory for information is enhanced when multiple pathways, or connections are created between the object to be remembered and the information about the object that is to be remembered Enhancing Memory for Advertised Information The advertising message itself The advertising media in which the message is placed © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Advertising Spend, SOV, and SOM for Top-10 Wireless Phone Brands Table 6.2 Advertising Spend, SOV, and SOM for Top-10 Wireless Phone Brands © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Advertising Spend, SOV, and SOM for Top-10 Beer Brands Table 6.3 Advertising Spend, SOV, and SOM for Top-10 Beer Brands © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The SOV Effect and Ad Spending Implications Figure 6.5 The SOV Effect and Ad Spending Implications © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Budgeting in Practice (cont’d) The Affordability Method Spending on advertising only those funds that remain after budgeting for everything else. Relegating marcom to a position of comparative insignificance (vis-à-vis other investment options) Marcom are implicitly considered relatively unimportant to a brand’s present success Challenge is to demonstrate that marcom do produce results © 2010 South-Western, a part of Cengage Learning. All rights reserved.