Advertising Budgeting

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Advertising Budgeting Professor
Close Sources Cravens and Percy(1998)
Murphy, Cunningham and de Lewis (2011)
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• We will discuss these topics of Advertising
  Budgeting
• Why Crucial
• 2. The 3 Budgeting Methods
• 3. Trends in Ad Budgeting
• Note, please refer to advertising as INVESTING,
  not spending, in our class and in your briefs
• why do I say that?

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1. Budget is Crucial to Ad Strategy
Target Audience
Advertising Objectives
Advertising Budget
Creative Strategy
Advertising Media and Programming Schedules
Implement and Evaluate Strategy Effectiveness
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• So, Why is ad or IBP budgeting crucial?
• Frankly, a companys success is a function of its
  growth in sales and profits
• What fuels that growth? ADVERTISING and MARKETING
• This, in turn, sparks WOM (and this can be free!)
• The economy has ups and downs, as do specific
  industries (Note the soft drink industry dropped
  4 in 2008 when our economy started hurtingso
  Pepsi invested 1.2 BILLION 2008-2011 in a
  marketing overhaul)
• THINK..Is this common sense? Would you advertise
  more, status quo, or less when times are tough?

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Tough Times? So, Re-Allocate to lesser
Investments Which are relatively smaller
investments?
New Media
Direct Marketing
Advertising TV, Radio, Outdoor, Print
WOM
Personal Selling
Sales Promotion
Event Marketing
Public Relations
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Your CEO asks you to propose an ad budget. How
would you calculate the ad budget?Why would you
pick this method?
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2. Three Ad/IBP Budget Methods (I dont even
want to mention the 4th) Budgeting Method
1aThe Percentage of Past Sales Method
A2 ƒ (S1) Where A2 is the total ad budget for
NEXT year (year 2 or quarter 2) ƒis a percentage
figure (see NAA industry norms) S1 is sales for
period 1 (or last years sales)
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Budgeting Method 1bThe Percentage of Forecasted
Future Sales Method
A2 ƒ (S2) Where A2 is the total ad budget for
NEXT year (year 2 or quarter 2) ƒ is a
percentage figure (see NAA industry norms) S1 is
sales for period 1 (or last years sales)
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Budgeting Method 1Percentage of Sales
Features
Drawbacks

• Fixed percent of sales, often based on past
  expenditure patterns.
• Relatively simple (if you have the information)
• You must calculate ad allocations as a fixed
  percentage of PAST SALES
• (e.g., last years sales)
• Can help with franchising.
• Note Peckhams Formula for new products, set
  S.O.V. _at_ 1.5 times your desired market share two
  years out

• Arbitrary.
• Budget may be too high when sales are high.
• Budget may be too low when sales are low.
• Ignores long-term effects
• You need benchmarks.
• You need advertising to sales ratios for the
  industry (note these are computed each year by
  pro. Ad organizations)
• Industries vary a lot (e.g., malt beverages
  invest 10 of annual sales on advertising movie
  theatres are closer to just 1 industry average)
• Note about 3 is an average ad 2 sales ratio

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Budgeting Method 2Competitive-Parity Method (I
call it the market share approach)
ASV (AF) ______ Ac
AF Where ASV is the firms advertising share of
voice (S.O.V) (anyone care to remind us what
S.O.V is?) AF is the firms advertising
expenditures for the period in question Ac is
all competitors advertising expenditures for the
period in question At least, think about a
competitive analysis
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LV
Brand 2003 Sales Billions Percent Change Operating Margin
Louis Vuitton 3.80 16 45.0
Prada 1.95 0.0 13.0
Gucci 1.85 -1.0 27.0
Hermés 1.57 7.7 25.4
Coach 1.20 34.0 29.9
At constant rate of exchange Gucci division
of Gucci Group Data Company reports. BW
LV increased advertising 20 in 2003?spends just
5 of revenues on advertising?half the industry
average
Cravens and Percy 1998 cited Business Week,
March 22, 2004, 98-102.
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Budgeting Method 2Competitive-Parity
Features
Drawbacks
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Budgeting Method 3Objective and Task
A ƒ (objectives) Where A is advertising
investment (the firms advertising expenditures
for the period in question) Objectives are
things that you want to achieve in said time
period (awareness, trial use, etc.)
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Link Objectives to Budget

• Need Recognition
• Finding Buyers
• Brand Building
• Evaluation of Alternatives
• Decision to Purchase
• Customer Retention
• Others?

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Budgeting Method 3 Objective and Task
Features
Drawbacks
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Budgeting Method Recap (Cravens and Percy and
Murphy, Cunningham and de Lewis)
Features
Drawbacks

• Percentage of Sales
• Fixed percent of sales, often based on past
  expenditure patterns.
• Can help with franchising.
• Comparative- Parity
• Budget is based largelyupon what competition is
  doing.
• Objective and Task
• Set objectives and then determine tasks (and
  costs) necessary to meet the objectives.

• Percentage of Sales
• Arbitrary.
• Budget may be too high when sales are high
• Budget may be too low when sales are low.
• Comparative- Parity
• Differences in marketing strategy may require
  different budget levels.
• Objective and Task
• The major issue in using this method is deciding
  the right objectives so measurement of results is
  important.

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Whichever method you choose, budgets vary due to

• Target Market(s)
• Desired Positioning
• Role of Promotion in Positioning
• Product Characteristics
• Stage of Life Cycle
• Situation Specific Factors (examples?)

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Which ad or IBP budget method is generally a best
bet?
Objective and Task
Percent of Sales (note Future or past)
All You Can Afford (note this is not a good idea
usually Proceed with caution.
Budgeting Methods
Competitive-Parity
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Ad/IBP Budgeting
I would argue for Objective and Task, because of
the logic and the strategic approach with
long-term appropriation and flexibility.
Budget Allocation
Media/ Scheduling
Creative Strategy
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3. Recent Trends in Ad/IBP Budgeting Decisions

• More Promotions/Less Ads
• International Markets mean more competition and
  harder to measure market share
• Clutter. Clutter. Clutter.
• Signaling Theory
• Short-term pressure to brand managers
• Less umbrella branding strategy (more narrow)
• Advocacy ads
• CSR movement
• Green movement
• Online ads a 25 BILLION a year industry (young,
  mobile, and measurable)
• Experiential/Event Marketing gaining prominence

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Approx. Annual Expenditures (billions)
Personal Selling Sales Promotion Event Marketing
Advertising