advertising budgeting professor close sources: cravens and percy(1998); murphy, cunningham and de...
TRANSCRIPT
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
StrategyTarget 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 $1.2 BILLION 2008-2011 in a marketing overhaul)•THINK…..Is this common sense? Would you advertise more, status quo, or less when times are tough?
WOM$
PublicRelations
Direct Marketing
SalesPromotion
PersonalSelling
Advertising: TV, Radio,
Outdoor, Print
New Media
Tough Times? So,Re-Allocate to lesser
InvestmentsWhich are relatively smaller
investments?
Event Marketing
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)
• 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
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
Features Drawbacks
Budgeting Method #1~Percentage of
Sales
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
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.
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
Features Drawbacks
Budgeting Method #2~Competitive-
Parity
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?
Features Drawbacks
Budgeting Method #3~Objective and Task
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.
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.
Features Drawbacks
Budgeting Method Recap
(Cravens and Percy and Murphy, Cunningham and de Lewis)
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?
Percent of Sales
(note: Future or
past)
Competitive-Parity
Objective and Task
All You Can Afford
(note: this is not a
good idea usually…
Proceed with
caution.
Budgeting Methods
Ad/IBP Budgeting
I would argue for Objective and Task,
because of the logic and the strategic approach
with long-term appropriation and
flexibility.
Media/ Scheduling
Creative Strategy
Budget Allocation
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)
0
$200
$400
$600 Personal Selling
Sales Promotion
Event Marketing
Advertising