Establishing Objectives and Budgeting for the Promotional Program 7 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Value of Objectives  Focus and Coordination  They help to orient everyone involved toward one, common goal.  Plans and Decisions  They serve as criteria for developing plans and making decisions.  Measurement and Control  They provide the standards and benchmarks for evaluating results.

Objectives Sales Objectives Communications Objectives

Not all Ads are Designed to Achieve Sales

Sales Objectives Specific, measurable outcomes within a given time period. Ex. sales volume, market share, profits, or ROI. A good sales objective is quantifiable, realistic and attainable. In addition, it also delineates the target market and time frame.

Problems with Sales Objectives Too many factors influence sales. Carryover effect: for mature, frequently purchases, low-priced products, advertising effect on sales lasts up to 9 months. Offer little guidance to the managers. Induce the managers to take a short- term perspective.

Many Factors Influence Sales Product Quality Promotion Distribution Competition Technology The EconomyPrice Policy SALES

Appropriate Situations for S.O. Induce an immediate behavioral response Direct-response advertising Retail advertising, ex. 新光三越, 家樂福. 新光三越 家樂福 Advertising plays a dominant role in a firm ’ s marketing program and other factors are relatively stable. Ex. packaged goods.

Sales Objectives are Appropriate for Direct Response Advertising

Communications Objectives Designed to achieve such communications as brand knowledge and interests, favorable attitudes and images, and purchase intentions.

Advertising and Movement Toward Action Conative Realm of motives. Ads stimulate or direct desires. Affective Realm of emotions. Ads change attitudes and feelings Cognitive Realm of thoughts. Ads provide information and facts. Purchase Conviction Preference Liking Knowledge Awareness Point of purchase Retail store ads, Deals “Last-chance” offers Price appeals, Testimonials Competitive ads Argumentative copy “Image” copy Status, glamour appeals Announcements Descriptive copy Classified ads Slogans, jingles, skywriting Teaser campaigns Related behavioral dimensions Movement toward purchase Types of promotions and advertising at each step

Inverted Pyramid of Communications Effects 90% Awareness 70% Knowledge 40% Liking 25% Preference 20% Trial 5% Use Conative Cognitive Affective

Setting Objectives Using the Communications Effects Pyramid Product: Backstage Shampoo Time period: Six months Objective 1: 90% awareness Objective 2: 70% interest Objective 3: 40% positive feelings and 25% preference Objective 4: 20% trial Objective 5: 5% main regular use

The DAGMAR Approach D efine A dvertising G oals for M easuring A dvertising R esults

Communication Tasks Four stages Awareness Comprehension Conviction Action

Characteristics of Objectives  Concrete, Measurable Communication Tasks  Well-Defined Target Audience  Have an Existing Benchmark Measure  Specify Degree of Change Sought  Specific Time Period Good Objectives Should Include:

DAGMAR Difficulties  Response Hierarchy Problems  Doesn't always define the process people use to reach purchase/use.  Attitude - Behavior Relationship  Attitude change doesn't always lead to change in actions or behavior.  Sales Objectives Are Needed  Sales are all that really counts, not communications objectives.  Costly and Impractical  The research and efforts cost more then the results are worth.  Inhibition of Creativity  Too many rules and structure curb genius. Legitimate Problems Questionable Objections

The Promotional Budget Establishing the budget Allocating the budget (budgeting approaches)

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 Assumption that sales are a direct measure of advertising and promotional efforts. Assumption 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

Additional Factors in Budget Setting Figure 7-11 Figure 7-12

Allocating the Budget Top-down budgeting Bottom-up 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 Percentage of Sales Competitive parity Return on investment (ROI)

The Affordable Method It is common among small firms and certain non-marketing-driven large firms. Logic: We can ’ t be hurt with this method. Weakness: often does not allocate enough money.

Percentage of Sales Sales dollar or unit product cost Future or past Pros Financially safe Reasonable limits Stable

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

Competitive Parity Method Pros Take advantage of the collective wisdom of the industry Cons Prisoners ’ dilemma

Bottom-Up Budgeting Total Budget Is Approved by Top Management Cost of Activities are Budgeted Activities to Achieve Objectives Are Planned Promotional Objectives Are Set

Bottom-Up Budgeting Objective and Task Method Payout Planning Quantitative Models

Objective and Task Method Three steps: Defining the communications objectives to be accomplished Determining the specific strategies and tasks need to attain them Estimating the cost associated with performance of these strategies and tasks

Objective and Task Method Establish Objectives (create awareness of new product among 20 percent of target market) Establish Objectives (create awareness of new product among 20 percent of target market) Determine Specific Tasks (advertise on market area television and radio and local newspapers) Determine Specific Tasks (advertise on market area television and radio and local newspapers) Estimate Costs Associated with Tasks (television, $575,000; radio, $225,000; newspaper, $175,000) Estimate Costs Associated with Tasks (television, $575,000; radio, $225,000; newspaper, $175,000)

Payout Planning payoutplan To determine how much to spend, marketers develop a payout plan that determines the investment value of the advertising and promotion appropriation Example of a three-year payout plan ($ millions) Year 1Year 2Year 3 Product sales Profit contribution per case) Advertising/promotions Profit (loss)(7.5) Cumulative profit (loss)(7.5)(0.25)21.63