Transcript Document

Advertising Budgeting
Professor Close
Sources:
Cravens and Percy(1998); Murphy, Cunningham and de Lewis
(2011)
We will discuss these topics of
Advertising Budgeting:
1.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?
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
So, Why is ad or IBP budgeting
crucial?
•Frankly, a company’s 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 hurting—so
Pepsi invested $1.2 BILLION 20082011 in a marketing overhaul)
•THINK…..Is this common sense?
Would you advertise more, status quo,
or less when times are tough?
Tough Times? So,
Re-Allocate to lesser Investments
Which are relatively smaller
investments?
New Media
Direct
Marketing
WOM$
Personal
Selling
Advertising
: TV, Radio,
Outdoor,
Print
Sales
Promotion
Event Marketing
Public
Relations
Your CEO asks you to
propose an ad budget.
How would you calculate the
ad budget?
Why would you pick this
method?
2. Three Ad/IBP Budget Methods
(I don’t even want to mention the 4th…)
Budgeting Method #1a~The
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 year’s sales)
Budgeting Method #1b~The
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 year’s sales)
Budgeting Method
#1~Percentage of
Sales
Features
•
•
•
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: Peckham’s Formula:
for new products, set S.O.V.
@ 1.5 times your desired
market share two years out
Drawbacks
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
Budgeting Method
#2~Competitive-Parity Method
(I call it the market share
approach…)
ASV = (AF)
______
Ac + AF
Where:
ASV is the firm’s advertising share of voice
(S.O.V) (anyone care to remind us what
S.O.V is?)
AF is the firm’s 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
LV
Brand
2003 Sales
Billions
Percent
Change*
Operating
Margin
$3.80
+16%
45.0%
Prada
1.95
0.0
Gucci**
1.85
Louis Vuitton
13.0
-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.
Budgeting Method
#2~Competitive-Parity
Features
Drawbacks
Budgeting Method
#3~Objective and Task
A = ƒ (objectives)
Where:
A is advertising investment
(the firm’s advertising
expenditures for the period
in question)
Objectives are things that
you want to achieve in said
time period (awareness,
trial use, etc.)
Link Objectives to Budget

Need Recognition

Finding Buyers

Brand Building

Evaluation of Alternatives

Decision to Purchase

Customer Retention

…Others?
Budgeting Method #3~
Objective and Task
Features
Drawbacks
Budgeting Method
Recap
(Cravens and Percy and Murphy, Cunningham and de Lewis)
Features




Percentage of Sales
Fixed percent of sales,
often based on past
expenditure patterns.
Can help with franchising.
Comparative- Parity
Budget is based largely
upon what competition is
doing.
Objective and Task
Set objectives and then
determine tasks (and costs)
necessary to meet the
objectives.
Drawbacks





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.
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?)
Which ad or IBP
budget method is
generally a best bet?
Objective
and Task
All You Can
Afford
Budgeting
Methods
(note: this
is not a
good idea
usually…
Proceed
with
caution.
Percent of
Sales
(note:
Future or
past)
Competitive
-Parity
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
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
Approx. Annual
Expenditures
(billions)
$600
Personal Selling
Sales Promotion
$400
Event Marketing
Advertising
$200
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