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 $

Sa

les

in

$

Point A

Profit

Sales Gross Margin

Ad. Expenditure

BASIC Principles of Marginal Analysis

IncreaseIncrease Spending . . . IF:The increased cost is less than the incremental

(marginal) return.

DecreaseDecrease Spending . . . IF:The increased cost is more than the incremental

(marginal) return.

HoldHold 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

Sa

les

Advertising Expenditures

A. Concave-Downward Response Curve

Sa

les

Advertising ExpendituresRange A Range B Range C

B. S-Shaped Response Function

Hig

h S

pen

din

gL

ittle Effect

Initial S

pen

din

gL

ittle Effect

Mid

dle L

evelH

igh

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

2007 Total dollar salesStraight % of sales at 10%

$1,000,000$100,000

2008 Advertising budget $100,000

Method 2: Percentage of Unit Cost

2007 Cost per bottle to manufacturerUnit cost allocated to advertising

$4$1

2008 Forecasted sales, 100,000 units

2008 Advertising 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.