Setting Advertising and Promotion Budgets in Multi-Brand Companies

7/30/2019 Setting Advertising and Promotion Budgets in Multi-Brand Companies

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QUALITATIVE RESEARCH

Setting Advertising and Promotion Budgets inMulti-Brand Companies

GEORGE S. LOW, Texas Christian University

JAKKl J. MOHR, University of Montana

Despite the best efforts of brand managers in packaged-goods companies, strategic advertising and sales promotion spendingdecisions are frequently subject to organizational realities such as power, politics, and fourth-quarter (or mid-year) budget cuts. Inmany companies, budget allocation decisions are subject to competing pressures: iong-term objectives versus short-term needs,risk versus reward trade-offs, personal career success versus what's best for the company, and so forth. Oftentimes, significantlygreater sums are allocated to sales promotion than to advertising to the detriment of the long-term competitive position of thebrand's image. This study examines the decision-making process brand managers use to set and allocate advertising and salespromotion expenditures for individual brands, with the objective of improving the process. We report the results of 21 depthinterviews, highlighting the "best practices" of companies that are proactively coping with budgeting pressures, and offersuggestions on how to protect and even increase, where warranted advertising spending. For example, the companies in ourstudy indicate that protecting advertising spending is more likely to happen when they:

Tolerate the uncertainty associated with advertising spending.

Allocate funds based on forward-looking objectives {rather than historical precedent).

Use more experienced brand managers who car balance marketing research information with intuition.

Remain focused on brand equity.

These and other suggestions to help managers improve their marketing communications budgeting decisions are discussed.

"The most common way that brand managers setbudgets is to start the same as last year. At least lastyear's budget produced last year's results. I've rarelyseen zero-based budgeting. The budget and itsallocation is typically based on the marketing plan andwhat needs to be accomplished. Judgment is very mucha part of the decision making process. Models are rarelyused."

Senior Marketing Vice-President, International

grocery products companyDESPITE THE DECISION-MAKING TOOLS available in thisinformation and technology age, frustration continues tohaunt managers who set and allocate advertising andsales promotion budgets. In the current climate of flatbudgets for many products and brands, and aconcomitant interest in brand equity, loyalty, andcustomer value, many managers are particularlyconcerned about the proportion of their marketingbudgets earmarked for short-term sales promotions asopposed to long-term brand advertising. Salespromotion accounted for 73 percent of all advertisingand sales promotion spending in 1996 (Cox Direct).

Manufacturers spent a staggering $489 billion, or 11%

The authors gratefully acknowledge the financial support

from the Marketing Science Institute, the College of Busiess,University of Colorado in Boulder, and the Charles Tandy/

American Enterprise Center at Texas Christian University. Inaddition, they appreciate the assistance of Linda Price, Eric

Arnould, and Bernie Jaworski in preparing for the depthinterviews. Also, the comments of three anonymous reviewers,

as well as Peter DePaulo, were especially helpful.E-mail: [email protected]

[email protected]

Source: Journal of Advertising Research, January, February1999, p. 67-78.

of sales, on trade promotions in 1994, up from $15billion or only 4 percent of sales in 1978 (Schiller,1996). The trend toward integrated marketingcommunications (cf. McArthur and Griffin, 1997;Schultz and Kitchen, 1997), together with concernsabout marketing budget efficiency, has pushed the

issues surrounding effective advertising and salespromotion budget allocations to the top of manyadvertisers' minds.Past research related to setting and allocating marketingbudgets has focused primarily on budgeting techniquessuch as the objective-and-task method, the affordablemethod, or percent of sales (cf. Bigne, 1995). Otherresearch has focused on factors that affect advertising-and-promotion-to-sales ratios (Ailawadi, Farris, andParry, 1994; Stewart, 1996), or factors that affect therelative allocation between advertising and salespromotion (Robinson and Luck, 1964; Strang, 1980).Yet, little is known about the day-to-day struggles of

managers who are faced with setting and allocatingthese budgets.The Advertising Research Foundation, the AmericanAssociation of Advertising Agencies, and the MarketingScience Institute recently launched a collaborativeresearch project called MAX: Managing AdvertisingExpenditures. The objective of their efforts is toimprove current practice with respect to budgeting andevaluating advertising expenditures. Their project ismotivated hy the concern that "many firms may have
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been making far from optimal investments inadvertising [which] could result in a decline in the valueof brands and in lower financial performance." Ourconcerns and objectives parallel those of the MAXProject.Our research focuses on improving our understanding ofthe advertising and sales promotion budget allocationdecision, identifying factors that enhance or impedeeffective decision making. When combined with theknowledge from other research of what "optima!"spending might be, our findings provide managersvaluable insight into how to improve their budgetallocation decision process.

METHODIn our desire to take a fresh look at this problem, weconducted a series of depth interviews (some in personand some by telephone) with 21 managers in 8 con-sumer products firms. We focused on packaged-goodsfirms because managers in this industry are responsiblefor large advertising and sales promotion budgets. Mostof the managers' organizations were large (over $1billion in sales and more than 5,000 employees), all hadnationally distributed products, and all used bothadvertising and sales promotion. We wanted to find out,based on managers' personal knowledge and experience,what factors influenced their allocation decisions. Thebest way to achieve this decision process perspective,we concluded, was by using a qualitative depth inter-view approach to generate rich descriptions ofmanagers' actual decision processes. The study's twoauthors personally conducted each interview.Because many different functions and levels areinvolved in advertising and sales promotion spendingdecisions, it was imperative to interview a wide range ofmanagers. The majority of respondents were brand,

product, and category managers (who were likely tohave the most comprehensive and accurate viewpointson advertising and sales promotion spending decisionsfor individual products). Other respondents had titlessuch as advertising manager, sales promotion manager,trade planning manager, and advertising researchmanager. Although the primary focus of our data-collection effort was on capturing the decision-makingprocess of experienced front-line brand managers, wealso interviewed high-level senior managers whosupervised groups of products and brands (such as anexecutive vice president and division general manager)to ensure senior management representation and to

provide as comprehensive a picture of the issues aspossible. Many of the respondents had a high degree ofexperience, with 21 percent of them having more than20 years' experience in the business; another 74 percenthad from 4 to 20 years of experience; the remaining 5percent had fewer than 4 years of experience.Lining up respondents proved to be one of the mostchallenging stages of the project. Brand and marketingmanagers were difficult to contact and most wereinitially reluctant to participate in research involvingnearly an hour of their time. Contacts made at

conferences were used in a snowballing technique toidentify senior marketing personnel and brand managersat major packaged-good companies in the United States.We encouraged their participation and asked them toidentify and invite brand and other marketing managersin their firm to be interviewed. Once these executivesunderstood the nature and purpose of the research, theybecame willing, even eager, to participate in our study,given the importance of the topic to their firms.Following standard interviewing procedures(McKracken 1988), we developed a series of broad,general questions about advertising and sales promotionspending decisions to guide our interviews, with morespecific probes within each area. Importantly, theprogression of the interviews was guided largely by therespondents. Approximately 45 minutes in length, eachinterview centered on three broad areas of questioning:

1. The decision processes and procedures used in thefirm to set advertising and sales promotionspending levels.

2. Factors that influenced the allocation.

3. The evaluation of the effectiveness of the

allocation.

These broad areas of questioning were refined on thebasis of informal discussions and pre-testing with fivemarketing managers at a national conference. Interestedreaders can obtain the interview protocol by contactingeither author.One particularly sensitive aspect of our interviews,which we carefully considered before data collection,was talking with managers about practices which mighthave deviated from established norms of effectivedecision making. For example, if internal power andpolitics were influential in the spending decision, would

our respondents be comfortable with acknowledgingthat fact and discussing it in some detail? To addressthese concerns, we paid particular attention to askingquestions in such a way that respondents felt: (a) therewas no judgment about their firm on our part and (b)that it was acceptable to acknowledge such factors. Inaddition, all respondents were assured of anonymity.Based on the responses we received in the interviews,we believe our qualitative method and questioningstrategies were effective in encouraging managers todiscuss sensitive budgeting issues.The interviews were taped, and 289 pages of single-spaced transcripts were typed and systematically

analyzed by both authors. First, the transcripts were readand checked for accuracy. Second, both authorsindependently re-read the transcripts and groupedcommon, recurring elements into categories. Eachcategory consisted of an important, influential factor inthe marketing communications budget allocationprocess and was supported with actual quotations fromthe interviews. The two authors then compared their twosets of categories, and similarities and differences werediscussed and resolved. The result of this analysis wasthe reconstruction of key themes and issues acrossinterviews, based on the qualitative data. These themes

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are reported in the following sections, relying on directquotes by managers for support. As always with qualita-tive data, caution is warranted in generalizing ourfindings beyond our small, nonrandom sample. Theextent to which the findings reported here arerepresentative of a larger population requires quan-titative estimation.

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OVERVIEW OF THE BUDGETINGDECISION PROCESS

Prior to discussing the specific factors that influence thebudget allocation between advertising and salespromotion, we first describe three importantcharacteristics of the budgeting process:

1. The nature of the decision process itself2. The different perspectives of the people involved in

it, and

3. The concerns about under-spending on advertisingand over-spending on sales promotion

Managers first establish the overallstrategic direction for the brand andset marketing objectives, ... Then,financial projections are madebased on forecasts and objectivesfor the next year.

The nature of the decision processAdvertising and sales promotion budgets are set andallocated together as part of the annual brand marketingplanning process (Low and Mohr, 1992). In many firms,a brand team approach to planning is used, involvingmanagers from sales, trade marketing, manufacturing,accounting, and marketing research, as well as the brandmanager, brand assistant, and group or categorymanager. Managers first establish the overall strategicdirection for the brand and set marketing objectives,based on an extensive situation analysis. Then, financialprojections are made based on forecasts and objectivesfor the next year. In addition, at this point, senior

managers communicate financial expectations for thebrand's contribution to the corporate product portfolio.Third, the advertising and sales promotion budgets areset in order to achieve the objectives, relying on acombination of quantitative models and managerialjudgment. The initial brand budget is then presented to asenior management panel who adjust and approvebudgets for all brands in the company. Then, the planand budget are implemented. Frequently, during theimplementation phase, unplanned changes are made.Finally, the advertising and sales promotion budgets,once spent, are evaluated by comparing the achievedresults with the objectives. This evaluation feeds intothe planning sequence the following year.

The different perspectives of people involved in thedecision

Inherent in the marketing communications budgetallocation process is the conflicting nature of theaccountabilities of the various people and functionsinvolved.1Marketers want to see their brand thrive andprosper over the long term, but they must meet thequarterly and annual bottom-line profit expectations of

1Our thanks to an anonymous reviewer for the insights about

these various roles and tensions.

senior management. The sales force is generally paid onvolume sold. Advertising agencies are generallycompensated by either a percentage of expenditures or aflat fee (neither of which is tied to brand volume orprofit). Research is charged with offering insightsavailable from data and is often blissfullyaccountable only not to be wrong. These varyingperspectives can set the stage for unresolvable valuejudgments in the budgeting process, many of whichemerged in our interviews.One important difference in perspectives that wasfrequently mentioned in interviews was the contrastbetween senior managers and brand managers. Brandmanagers formulate and implement plans for theirindividual brands to meet market needs, whereas seniormanagers seek to meet corporate needs. These twoperspectives may not necessarily be in harmony. Indeed,given the specified role of the brand in the overallcorporate portfolio, and modifications made by seniormanagement during both the planning andimplementation processes, brand managers may nothave as much influence as they would like in setting thebudget on a given brand. To some extent, the dynamics

between brand and senior managers may be a functionof corporate culture. In some organizations, such asProcter and Gamble, brand managers are expected topersuade and "push back" senior management, to find away to get the funds they need. However, in othercompanies, senior managers have the final word inbudgeting decisions, and brand managers would bejeopardizing their future with the firm if they pushedback (Decker, 1998).

Concerns about underspending on advertising andoverspending on sales promotion

A frequently mentioned concern which weaves itself

through most of our results was respondents' overalldissatisfaction with the relative allocation between ad-vertising and sales promotion. Brand managers are paidto make budget allocation recommendations that are inthe best interest of their brands. The majority ofmanagers we interviewed clearly expressed their desireto increase advertising and support their brand's long-term equity. They also voiced their frustration withperceived over investments in sales promotion whichthey felt would lead to devalued brands and lowerfinancial performance in the long run. Although thisperceived imbalance did not hold true across all firms some pointed out the many advantages of using sales

promotions there is much evidence, such asincreasing retail concentration and a focus on short-termearnings (cf. Farris and Quelch, 1987) to support theseconcerns. Indeed, several of our respondents were quiteexplicit in their desire to see advertising given "equalopportunity" in the corporate environment and to off-setthe pressures which tend to increase sales promotionexpenditures with counterbalancing factors that wouldgive advertising a better chance at the available pool offunds. We describe and discuss these competing forcesin the next section.

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FACTORS AFFECTING ADVERTISING AND SALESPROMOTION BUOGET ALLOCATIONS

Based on the insights from our respondents, we groupedour specific findings into three main categories:1. The Good practices which managers felt

contributed to an effective decision process.2. The Badpractices which were uncontrollable,

frustrating realities of the decision process.3. The Uglycorrectable flaws or problems in the

decision process.

Although we treat these categories as being fairlydistinct, they are very interrelated. By being more awareof the contributors and barriers to effective budgetallocation decision making, managers may be able tobetter encourage or counterbalance their effects.

The Good

A number of managers shared with us aspects of theiradvertising and sales promotion budgeting decision thatthey felt were effective, especially those that gaveadvertising a more equal voice in the budget allocationprocess. These "best practices," divided into three mainheadings, include:

Encourage risk in the organization.

Combine quantitative models with judgment.

Focus on brand differentiation.

Encourage risk in the organization The extent to whichrisk taking is encouraged or tolerated by theorganization has an important influence on advertisingand sales promotion budgeting decisions (e.g.. West andBerthon, 1997). If a firm wants creative ideas andapproaches, it must offer its decision makers theopportunity to learn from the market and the freedom tomake mistakes. Indeed, research on innovation suggeststhat penalizing people for creative ideas that do not

work out is a strong way to stifle creativity (Amabile,1983). Tolerating inherent risk and ambiguity thatcharacterize advertising allocationsand the attendantconsequences may encourage more creativity inmarketing plans.However, as one brand manager commented:

The corporate culture makes the bottom line. If yougo out on a limb and spend ten million dollars anddon't make the plan and don't make the profit, you'regone.

In this situation, the manager felt that advertisingspendingwith the accompanying possibility that itmay not deliver the planned resultsmight be risky. In

fact, as this manager said, not making "the plan" couldlead to being fired.In addition, many firms have a business climate thatdoes not generally encourage risky, creative advertisingideas. One manager we interviewed commented:

The business environment, a kind of sociology, ifyou will, makes it very difficult for great advertisingto come out today. Compared to years ago whenowner-entrepreneurs would look at great advertisingand say, "you're right, I understand why that wouldbe appealing."

The inherent riskiness of advertising spending comparedto sales promotion spending further exacerbates thissituation. For example, consumer and trade promotionoutcomes are more easily measured than advertisingoutcomes. The following manager noted this whenreferring to the effects of sales promotions.

The research over the past ten years showing thesales spikes when sales promotion has been used hasbeen a disservice to marketing. The heart of themarketing plan is consumer value and brand equity.We try to reward people who are adding value.

We expect that in risk-averse companies, managers willallocate relatively more dollars to sates promotions andless to advertising. Given the inherent creativityinvolved in advertising decisions, as well as the inherentambiguity that surrounds them, firms may need to take agood hard look at their corporate culture to assesswhether or not it penalizes advertising because it ismore risky. A senior marketing manager we interviewedfelt that one way to deal with this problem would be tomake advertising seem less risky, as this quoteillustrates:

It's stupid to go out and say, "look at how creativewe are." I think what is smart to do is get a bunch ofcreative people and say, "now we are the advertisingagency that doesn't have any guys with beardsworking at it. They look like they all work for IBM.They think and act like they all work for IBM. Theycome up with the same creative ideas. But in a waythat is perceived as safer and more left brain, morelogical, more rational."

Given the inherent risk-aversion in most companiestoday, this approach - where advertising and otherlong-term communications efforts are made to appearless risky by supporting creative, brandfranchise-building ideas with research results and by

demonstrating their short-term effects may be useful.Combine quantitative models with judgment Theincreasing sophistication and use of marketinginformation (such as single-source and scanner data)and computer systems have the potential to assistmanagers in setting and allocating their marketingbudgets. In our interviews, firms who developed andused modeling techniques to guide the allocationdecision appeared to be more successful at attaining amore "optimal" budget allocation. As these twomanagers explained:

We happen to have a promotional analysis systemprovided for us by Nielsen, based on actual

consumer sales using supermarket scanner data,which shows that in our product category, featurepricing wasn't generating incremental sales. Welearned that we didn't need to be spending thosedollars there and looked for other ways to spendthem.

We had McKinsey do a study for us which showedus that we are wasting our money just putting dollarsout there for the trade. We were getting tradecustomers to buy, but we weren't getting consumerpull-through. We were loading warehouses.

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These comments illustrate that, interestingly, thereliance on hard marketing information, which manybelieve can bias budget allocations to promotional toolswith easily measured results, does not necessarily leadto more sales promotion spending. Indeed, dependingon the specific results of this kind of analysis, such datamay work against allocating dollars to consumer andtrade promotions. Brand managers may also need towork harder to get quantitative support for their adver-tising programs. For example, copy testing comparingthis year's campaign to last year's might be an effectiveway to get more objective assessments of advertisinginto the process.Despite the increasing reliance on quantitativemarketing models, our respondents noted the tendencyof their spending decisions to be based on gut feel andintuition:What gets a lot of support simply depends on how muchpeople like [the ideas]. How much senior managersthink: "boy, that's a great (or lousy) ad" despite thefact the lousy ad might be proven to be effective. It's gutreaction and intuition. There's a massive amount of gutreaction.

Clearly, managerial experience can be valuable when itis based on sound judgment and intuition. Whileanalytical models are useful, managers often rely on in-sights based on personal experience in order to adjustthe information provided by the models. Indeed, priorresearch shows that combining output from analyticalmodels with managerial judgment and intuition can leadto the best decisions (Blattberg and Hoch, 1990).In the advertising area in particular, managers have atendency to rely on judgment and intuition: results fromadvertising expenditures are perceived as being moredifficult to quantify than those from increasedpromotional spending. Further, budget allocations to

advertising are often heavily influenced by theanticipated quality of the advertising creative message,which in many firms is a subjective decision as well.Our results show that allowing more experiencedmanagers to use their well-trained judgment mayactually result in more effective budgeting decisions, asillustrated by this manager:

I think experienced managers tend to be morewilling to take risks on the fact that advertising willhave an impact.

Some would go so far as toargue that brand equity andquality creative are a brandmanager's key responsibilities.

Yet, other managers express a continued desire forbetter quantitative techniques to isolate the sales effectsof advertising:

I would like some kind of model which wouldevaluate the incremental sales contribution of

advertising spending. That's the toughest of all. Isadvertising really contributing to sales, and what partof the brand's sales increase can be attributed toadvertising? And how do we know that $20 millionin advertising is enough? Or too much? What is theoptimal spending level? Those questions are stillunanswered. We need more science in it.

Increasingly, such quantitative tools are available from avariety of research firms. Marketplace modeling ofadvertising, consumer promotion, and trade promotion

is being used to guide optimal marketing spending atlarge packaged goods companies. Clearly, managersshould continue developing expertise and comfort inusing more quantitative tools, in addition to their expertjudgment in making budget decisions.Focus on brand differentiation. The power of the brand'smarketing idea is the strength of a product'sdifferentiation, competitive advantage (both real andperceived), or unique selling proposition. A commontheme in our interviews was that brand differentiationstrategies facilitate a more balanced advertising andsales promotion budget.

Next year they're talking about cutting our trade

budget. And I really don't have a problem with it. Itseems like the message is more powerful than whatthe trade dollars are doing . . .

And our trade customers are selling more of the 30-35% margin [based on effective advertising]. That'sa heck of a lot more dollars in their pocket versus the$1.20 a case that they would get three times a quarter[on a trade promotion].

And, as another brand manager said:

To the degree that we can be persuading consumersto buy our products on the strength of ideas, asopposed to the lowness of the price, that's a goodthing. The people who win are those who have

added value through consumer-focused communi-cations and not through trade deals.

These quotes illustrate the importance of basingallocation decisions on the power of the brand'smarketing idea: a strong brand provides a convincingrationale for budgeting and allocating a greater amountto advertising. This issue is clearly related to brandequity, a topic to which managers in our interviewswere sensitive:

Advertising was so minimal that our sales keptdropping, even though we put a lot of money intotrade promotion. We've done more advertising nowthan in the past five or six months because we

realized we cannot continue this trend of de-emphasizing advertising and using trade promotion.We just don't have the brand equity we used to.

But the mold had been cast and since then, pricepromotion has been a major problem in this industry.At the height of the buy one-get one free activity, thecategory took its worst plunge up to that point, andthe category went down 10%. And we said toourselves, what's going on? And what we found outis the message we were giving the consumer is:"This product isn't as good as it used to be it's notworth what it used to be." Whether the quality hadactually gone down is irrelevant, it's the perception.

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The importance of the strength of a brand's message andbrand equity in the allocation decision deservesreiterating: brand equity and quality creative ideas areimportant ingredients in budget allocation decisions.Some would go so far as to argue that brand equity andqualify creative are a brand manager's keyresponsibilities.To be sure, advertising is vital to brand equity.However, advertising, per se, is not a sacred cow thatshould necessarily be part of every year's marketingallocation. Monies should be allocated to advertisingonly if it has a clearly defined role within that year'sstrategy for meeting a brand's goals. Without a USP,important news, or a strategy to sustain brand-imagedevelopment, advertising budgets might best beotherwise allocated. While this reality may be difficultfor a brand manager to accept, it may be the bestdecision for the brand, as well as for the company as awhole.

The Bad

For many marketers, there are uncontrollable,

frustrating realities in the budgeting process, farremoved from the "best practices" notions detailedpreviously. For the most part, managers were able toadjust their decision making in ways that allowed themto cope with (rather than change) these frustrations andminimize their impact on effective decision-making.Three factors in this category emerged from theinterviews:

retailer power

short-term focus

top-down influence

Retailer power relationships with channel members

clearly are tied to a firm's relative spending onadvertising or sales promotion, as witnessed by Procterand Gamble's difficulties with retailers in implementingits every-day-low-price policy. Our interviews werereplete with specific examples of trade members'"strong-arming" manufacturers, threatening to dropproduct lines without more spending on tradepromotions. For example:

When you look at the leverage between increases involume as a source of income gains for them(retailers) versus increases in their marginsstemming from increased allowances, the thing ishighly leveraged toward allowances. They're able toget a whole lot more money on the table more

quickly by extortion in some instances than bynecessarily working as partners with us in movingthe business forward and trying to move additionalvolume.

Managers we interviewed are working with retailers tochange this situation even if the retailers themselvesare not. Managers handled this by working with retailersin making trade promotion dollars more effective byforming partnerships to find win-win solutions. Suchpartnerships allow the manufacturers to work with theretailer in more creative ways that can be beneficial to

both (Mohr and Low, 1993). Some of the solutions usedby participants in our study included measuring theeffectiveness of promotional activities for retailers,planning joint promotions that are effective for bothparties, category management, and even paying retailersfor long-term growth in important categories. In suchcases, relationships may become more cooperative andless antagonistic. Trade promotion dollars may be lessimportant in such situations since the relationship willbe built on trust and cooperation rather than on powerand financial incentives like slotting allowances. Astrade partnerships are formed, with an increase incommunication and the establishment of mutualobjectives between manufacturers and retailers, trade-directed promotion may involve more time and lesscash. As the following manager pointed out, the short-term nature of trade promotions may actually workagainst forming partnerships that necessitate a long-termfocus and commitment from both partners:

[Partnerships] have been held up or held back due toshort-term decision making . . . slotting [allowances]can get in the way of forming long-term partnershipswith our retailers.

Short-term focus. Firms in today's businessenvironment grapple with the need to deliver quarterlyresults that show steady improvement. The quickturnover in brand management, where managers arepromoted to a different brand each year or two, putsextreme pressure on brand managers to deliver results or(at the extreme) lose their jobs. This pressure clearlyaffects marketing communications spending decisions:

Brand managers' careers are based on making thingshappen quickly. . . . You have your annual profitgoals to make and when you're not making your vol-ume goal, it's an easy target to take money fromadvertising.

Financial pressure encourages people to build thenumbers around achieving a quick profit, rather thansaying, "Am I building a plan that is beneficial to thelong-term image of the brand?"

It is highly unlikely that somebody who is beingmeasured monthly or quarterly is going to take anenlightened view of a long-term profitable marketingplan.Brand people have to show progress they have to sellmore each quarter than the year before. The easiest wayto do that is through trade promotion.Given these short-term pressures at the brand level, one

might hope that senior management is looking out forthe long-run interests of the brand. However, at leastone example shows that senior managers are notimmune to these short-term pressures either:

Our president is responsible to shareholders and thebanks, and he feels pressure in that environment ...there is no question that in the allocation of theactual marketing dollars, that the short-term focus tonot only make the quarter, but make the month, hasdriven some of our thinking and in fact it's drivenmore of our contingency planning. You go into afiscal year, you develop a budget, and the way

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budgets are reallocated is definitely more in favor ofmaking and achieving short-term goals.

The firm's compensation system is also an importantcontributor to this short-term mentality. While there aremany compensation issues related to advertisingspending decisions, one that emerged from ourinterviews involved the discrepancy in evaluationsystems between sales and brand managers. Those firmswhere compensation systems are being updated to

reflect uniform profitability goals across sales andmarketing are more successful in achieving the desired,strategic mix of sales promotion and advertising.Courage and discipline were also frequently mentionedin the attempts to overcome short-term thinking.We need to discipline ourselves to have less of anemergency orientation. It requires discipline andforesight to get through the short term and not betempted to spend inappropriately to address immediateproblems.It's just a matter of discipline and getting that sellingproposition, the creative to the level that it really isgoing to be effective and then having the intestinal

fortitude to stick with it.

Top-down influence. In many companies, seniormanagers influence the budgeting decision in ways thatmake sense at a corporate level, given their broaderresponsibilities and concerns. However, their broaderconcerns may necessitate tradeoffs that can be perceivedas damaging to an individual brand. We recognize thatthis perception may stem from the bottom-upperspective of the brand managers and some of the otherrespondents whom we interviewed (who may resent theinvolvement of management in "their" budgetingdecisions). However, the perception that seniormanagers' influence prevented effective decision

making at the brand level was so prevalent in ourinterviews, we feel it deserves mentioning here as afrustrating reality of the decision process. As onemanager pointed out, negotiating a budget with seniormanagement can be disappointing:

Managers can do little to preventtop-down influence, but they candeal with it by making it clear tosenior managers what the potentiallong-term consequences of suchdecisions can be.

It's top-down in terms of total dollars and then ittends to be fairly iterative in terms of the allocationof those dollars between advertising, consumer, andtrade , . . Generally, we're given a total number fromthe top. We develop a program, it gets kicked aroundbetween our vice-president and the president of thecompany. It comes back and then we go back andforth until we get a plan that I'd like to sayeverybody's happy with, but really it means that theguy at the top is happy with.

This quote illustrates a common concern voiced across a

number of interviews that budget numbers arecoming down from the top, from managers who are re-moved from the brand's business and who do not rely ona careful analysis of objectives and quantitativeevidence in making their decision. Indeed, the input ofsenior managers may not be subject to the samerigorous analysis on which the original allocation wasbased:

The organization functions in two very differentways. The people on the lower levels try to be veryanalytic and figure out the best recommendation.Senior managers operate much more judgmentally. Itis not scientific.

While not explicitly stated by our respondents, theimplicit message is that brand managers believe thattheir own judgment can be an asset in thebudget/allocation decision process because it is typicallycomplemented with logical reasoning and researchresults, whereas senior managers' use of judgment isviewed as problematic.Frequently, senior managers' involvement in thebudgeting process comes during the implementationphase, when they react to financial pressure and dictate

changes to the budget which deviate significantly fromthe plan.

The Vice President of our product group was gettingheat from upstairs to "get out of the business ifyou're not going to make money on it." He decidedto cut media. It went from $13 million at one pointall the way down to $2 million. Our New Yorkagency threw up their hands and said "forget it, we'renot going to do any more plans." We had probablyfifteen plans, which was terrible. I thought weshould have paid them some kind of penalty.

Managers can do little to prevent top-down influence,but they can deal with it by making it clear to senior

managers what the potential long-term consequences ofsuch decisions can be. The degree to which they can doso will depend on the corporate culture and expectationsof brand managers in the firm.

The Ugly

This final set of factors includes the flaws or problemsin the advertising and sales promotion budgetingdecision process that are more correctable in nature thanthe previous set. Many managers have found ways tocounteract the problems presented below, and wediscuss these ideas as well. Three such factors/practicescame out of our study:

political sales force influence

historical inertia

ad hoc changes

Political sales force influence By its very nature,organizational decision making is a political process(Piercy, 1987). A number of managers interviewedsuggested that such political behavior is commonlyexhibited by the firm's sales force when advertising andsales promotion spending decisions are being made. Asone manager observed:

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You've got a huge political force inside everycompany that has a sales force. For example,everybody knows that trade promotion is bad.Coupons we feel are bad and so forth short term,doesn't build equity and all that. On my brand weproposed moving our trade budget down. I had myboss's approval to do that, and we took it to a salesmeeting, and the sales people said "we don't want todo that," and my boss said, "oh gee, I guess webetter not do that," and therefore, it was never done.

The political behavior of members of the sales forceoften takes the form of informal, casual conversations inhallways, cafeterias, etc. The following manager's com-ments illustrate this well:

The fact of the matter is that, because sales unlikesay, the consumer promotion agency or theadvertising agency lives here in the building ...it's just that they're here. It's the power of proximity.

... including the sales force in theformal planning process might bean important factor in minimizing

the impact of political influence inbudgeting decisions.

The political pressure of the sales force to emphasizesales promotion is not a surprising phenomenon.However, several of the managers with whom we spoketalked about how to strategically use the sales force tohelp reduce sales promotion spending. Many firms use abrand team approach to marketing planning whichtypically includes the direct, formal involvement of arepresentative of the firm's sales forcea group whichhas a particular interest in the amount of the marketingbudget allocated to sales promotion. Although one

might expect that in such instances, the sales forcerepresentative may attempt to maintain or increase thebudget allocation to trade promotion, the depthinterviews revealed that when sales people are includedas a formal member of the brand team, they oftenexhibit greater commitment and less antagonism to theresulting allocation (regardless of the relative spendingon sales promotion) than when they are not formallyinvolved. As one product manager explained:

In terms of working through the plan, our salescounterpart worked with us step by step through theanalysis. I would characterize his involvement as akind of devil's advocate, in terms of helping us think

through the right questions to be addressedanalytically. But in terms of his involvement, beingthat it was up front, and he was part of the process,he explicitly bought into the conclusion at the endpoint.

This latter insight shows that actually including the salesforce in the formal planning process might be animportant factor in minimizing the impact of politicalinfluence in budgeting decisions. If the sales managerparticipates and believes in the process used to allocatebudgets, she or he may have greater commitment to

implement the plan, even if it means a reduced level ofspending for trade promotion.

Historical inertia. One factor that emerged stronglyfrom our interviews was the effect of historicalprecedent on a firm's spending decisions. To a largeextent, the trend toward sophisticated modeling andobjective-task ("zero-based") budgeting led us toinitially underestimate the importance of the effect of

historical inertia. However, the managers weinterviewed repeatedly mentioned the impact of theprevious year's advertising and sales promotion budgetin the decision process.In the absence of good hard information that givespeople a road map on how to allocate resources, theywill do in most cases what has historically been done,with a bit of intuition thrown in. And that, of course, istempered by just how available resources are.

Clearly, the number one factor is precedent. 1 thinkeverybody enters into the process by looking at whatwas the relative allocation to advertising, consumerpromotion, and trade promotion historically. Andthat forms the benchmark.

If you vary much from the historical you have toprove it.

We had a number in mind going in that we haddeveloped in the prior year as far as what we needed,and then from that point, you look at either goinghigher or lower based on the previous year's number.

Trade promotion spending was a big part of thatprecedent:

Trade's a given, and every time you give in andincrease your trade spending it never comes back, itnever goes away. That's a cost of doing business youbuild in and that's where you start.

Some managers were wary of the reliance on historicalprecedent:

Temper that [the allocation] with reason historyand reason are different. History isn't alwaysreasonable.

Even when managers can "prove" a reason to deviatefrom historical precedent, senior managers might notfollow it. For example, one of our managers had resultsfrom a controlled experiment that showed moreeffectiveness from a radically different allocation thanhistorical precedent. But, the senior managers would notbuy into the results and would not change the allocation.

Some managers noted a desire and effort to better matchallocations to a brand's goals for the coming year, ratherthan relying on historical precedent. For example:

Our plan is still one of building awareness, highawareness for the brand because it is relatively new.But at the same time we needed to build trial. Ourrepeat purchases are very high on this brand. Once aconsumer tries it and really likes it, he comes backand buys not only the product, but he buys in greaterquantities. So our objectives are real clear: a lot ofawareness and a lot of trial. So we put more moneyinto media and the percentage of promotions

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decreased.

Managers who reported a strong influence of goals andobjectives for the brand on their spending decisionsgenerally felt the resulting allocation was more "opti-mal." This is a very important point, because settingobjectives can help to overcome some of the barriers toeffective decision-making in setting and allocatingadvertising and sales promotion budgets.

Ad hoc changes. A number of managers expressed

concern with changes made to their advertising andsales promotion budgets during the implementationphase. These modifications are often made quickly inresponse to unexpected developments in themarketplace, without regard for the long-termconsequences of such changes. The following quotescapture this:

In a sense it's reactionary. You go into the year witha plan that's really ideal in some respects. But as yougo through the year, if you're not making your plans,you have to spend less money to compensate for theshortfall. If I then cancel a trade or consumerpromotion, my sales will even fall shorter. If I don't

run the advertising, sales may not be affected toomuch since advertising is more long-term and I canpick it up again later.

They are constantly slashing the advertising budgetto pay for all the additional trade deals. You see a lotof it. They will come out with a certain advertisingbudget and keep cutting it down, down, down.

This manager felt that not much could be done about adhoc changes. It is the nature of business and alsoillustrates well the point of view of senior management:

Flexibility is a central part of managing brands. It'sfire drills, it's reality. There's lots of things you haveto be prepared for. You have to realize that any bigcompany is a portfolio of different cash streams. Ifone cash stream goes down, the tendency is toportfolio manage and ask other people for more.That happens all the time.

However, changes made to the original brand plan inmid-year can compromise its original intent:

The easiest budget to put together from a strategicstandpoint is the one going into the year. It'smaintaining that budget and maintaining thestrategic integrity of that budget that is mostdifficult.

While difficult, maintaining the "strategic integrity" of

carefully planned budgets is possible by includingcontingency plans and anticipating potential bumps inthe road.

CONCLUSIONS

The advertising and sales promotion budgeting processconhnues to be a perplexing issue for advertising andbrand managers. Our research was motivated by a desireto better understand the factors that affect the allocationbetween advertising and sales promotion. Most of themanagers we interviewed felt that institutionalized

pressures led to a greater proportion of their marketingbudgets being spent on sales promotions than theywould have liked and wanted to see advertising given"equal opportunity" in the corporate environment.

Effective advertising budgets areconceived in a strategic planningframework which includes an

integrated marketingcommunications philosophy.

The results of our study have implications for at leastthree groups of people: brand managers, advertisingagencies, and marketing researchers. The primaryimplication is that brand managers should use acomprehensive marketing strategy to guide theirmarketing communications budgeting decisions andavoid the piecemeal approach of making advertising andsales promotion spending decisions independently.Effective advertising budgets are conceived in astrategic planning framework which includes an

integrated marketing communications philosophy. Suchan approach allows managers to make more direct trade-offs in allocating budgets. Based on our results,managers who desire a more equitable advertising-salespromotion budget allocation should also:

1. Use a brand team approach - involve managersfrom many departments in budgeting decisions.

2. Build contingency plans into the budget allocationwhich anticipate potential mid-year or fourth-quarter changes.

3. Consistently evaluate the performance of pastprograms by comparing outcomes to the intendedstrategic objectives.

4. Focus on long-term, overall performance.

Advertising agencies can also benefit from our researchfindings. For example, account executives could workclosely with clients to:

1. Focus on building stronger brand equity, adopting amore holistic view of clients' organizations andmarketing strategies.

2. Center the advertising planning process on goals forthe coming year (versus inertia or historicalprecedent) such as specific awareness or salesincreases.

3. Be aware of the influence of sales, and channelmembers on the allocation decision.

4. Adopt a more strategic point of view in helpingclients determine the amount to spend onadvertising and sales promotion programs. Moreadvertising may not always be the solution, de-pending on the brand's positioning strategy.

While some of these issues are outside of an ad agency'sresponsibility, advertising executives can help clients tobe aware of the potential influence of such factors. By

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making clients aware of these hurdles to effectivedecision making, behavior can be changed.The third group who can benefit from the results of thisstudy is marketing researchers. As pointed out in severalof our interviews, marketing researchers continue todevelop sophisticated tools to better explain and predictsales response to advertising and sales promotion spend-ing. Our findings suggest that knowing the "optimal"amount to spend on advertising is only one piece of thebudget allocation puzzle. An equally important piece iscreating a corporate environment that allows the desiredlevel of spending to occur. As they develop analyticaltools to discover the optimal amount for advertising andsales promotion spending, marketing researchers shouldrealize the hurdles involved in getting the optimalspending amount approved and implemented. Modelscould be developed which incorporate managerialjudgment, corporate objectives, and long-term outcomesin order to provide a more realistic and useful decisiontool.Organizational realities are a major barrier in effectivelyallocating advertising funds, given the pressuresoutlined in our study. By actively dealing with these

pressures head on, managers can significantly improvethe way they determine their advertising and salespromotion budgets.

GEORQE S. LOW is an assistant professor in the marketingdepartment of the M. J. Neeley School of Business at Texas

Christian University in Fort Worth, Texas. His Ph.D. in marketing isfrom the University of Colorado-Boulder. He also received an M.B.A.from the Ivey School of Business, University of Western Ontario, anda B.A. in advertising from Brigham Young University. He spent fouryears as a media planner with MacLaren McCann Advertising(Canada). His research focuses on integrated marketingcommunications management and has been published in the Journalof Marketing Research, the Journal of Retailing. MarketingManagement, and the Marketing Science Institute's working paperseries,

JAKKI J. MOHH is associate professor of marketing at the Universityof Montana. She has a Ph.D. (1989) in business marketing from the

University of Wisconsin. Prior to her position at the University ofMontana, Professor Mohr served on the faculty at the University ofColorado, Boulder (1989-1997) and worked in advertising in SiliconValley for Hewlett Packard's Personal Computer Group andTeleVideo Systems. Her research has been published in the Journalof Marketing and the Strategic Management Journal, and otherjournals.

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Documents

Setting Advertising and Promotion Budgets in Multi-Brand Companies