Professional Documents
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Adv Vs Sales
Adv Vs Sales
The authors gratefully acknowledge the financial support from the Marketing
Science Institute, the College of Business at the University of Colorado-Boulder, and
the Charles Tandy American Enterprise Center at Texas Christian University. In
addition, they appreciate the encouragement and helpful comments of David Olson
(Leo Burnett Advertising), Katherine Jocz, Rick Staelin, and Paul Root (MSI) and
David Cravens (TCU).
The current issue and full text archive of this journal is available at
http://www.emerald-library.com
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 9 NO. 6 2000, pp. 389-414, # MCB UNIVERSITY PRESS, 1061-0421 389
Budget an important issue Previous empirical research on advertising and sales promotion budgeting
has examined the relationship between product and market characteristics
and advertising/sales ratios (Farris, 1977; 1978; Lancaster, 1986), promotion/
sales ratios (Quelch et al., 1984), and advertising-and-promotion/sales ratios
(Balasubramanian and Kumar, 1990; Fader and Lodish, 1990; Farris and
Albion, 1980; Farris and Buzzell, 1979). The amount budgeted to advertising
and promotion relative to sales is an important issue. The findings from this
research indicate that a variety of product and market factors (such as market
growth rates, market share, competitive activity, and a product's relative
price) are significantly related to advertising and/or sales promotion
spending levels. However, none of these studies examines the firm's relative
allocation to advertising versus sales promotion. The relative allocation issue
is critical for many brand managers today whose budgets are flat or
declining, and who must make trade-offs in deciding how to best allocate
scarce marketing communications resources. For example, according to 1998
national US media spending figures, ten of the largest packaged goods
advertisers actually decreased their overall advertising spending vs 1997
(Advertising Age, 1999). These included national brand manufacturers
Procter and Gamble (±3.4 per cent), Philip Morris (±4.1 per cent), Bristol-
Myers Squibb (±22.3 per cent), Johnson and Johnson (±11.3 per cent), Mars
Inc. (±11 per cent), Kellogg Co. (±19.7 per cent), Hershey Foods (±7.4 per
cent), Colgate-Palmolive (±4.7 per cent), Quaker Oats Co. (±5.1 per cent),
and Nabisco (±3.9 per cent). Mantrala et al. (1992, p. 173) suggest that sales
and profit are more sensitive to the way a budget is allocated than to its
overall level; they comment that ``more behavioral research on how
marketing organizations approach allocation decisions as opposed to
investment-level decisions is needed''. Surprisingly, this call for research on
allocation decisions has gone largely unheeded.
Two significant issues As stated earlier, most prior research on the advertising and sales promotion
budget issue has focused on understanding factors that are related to the ratio
of marketing communications spending to sales. In our analysis of this
research, two significant issues arose. First, many extant advertising and
sales promotion studies have emphasized market growth rates and market
share as predictors of advertising and sales promotion spending
(Balasubramanian and Kumar, 1990). Indeed, the recent series of articles on
this topic (Ailawadi et al., 1994; 1997; Balasubramanian and Kumar, 1997a;
1997b) focused more on technical issues of data analysis than on substantive
questions about the underlying theoretical framework and managerial issues.
Lost in this dialogue is a potentially important suggestion:
Efforts would be better spent searching for other variables [in addition to market
share and market growth rates] that can do a better job of explaining advertising-
and-promotion/sales ratios (Ailawadi et al., 1994, p. 97).
Our review of the relevant literature suggests that research is needed on
variables which are actionable by management, since market share and
growth, for the most part, are not. Commenting on past research on
advertising and promotion budgeting decisions, Stewart (1996) called for the
inclusion of more decision-making variables such as stage of the product life
cycle. Stewart further suggested that the firm- and SBU-level PIMS and
Compustat data used in previous studies lead to potentially misleading
conclusions ± the appropriate unit of analysis should be the brand.
A second crucial issue in understanding brand-level advertising and sales
promotion budgets is the fact that the perspective of the people who make the
allocation decision ± brand managers ± has mostly been left out of prior
Scale purification
Multi-item scales assessed The multi-item scales were assessed for reliability and validity using
confirmatory factor analysis (LISREL VII) and standard reliability analysis.
The overall confirmatory factor analysis fit (each multi-item scale loading on
separate latent constructs) was acceptable, with a GFI of 0.87, AGFI of 0.77,
chi-square of 115.37 with 32 degrees of freedom. The coefficient alpha for
short-term perspective was 0.89, for perceived consumer attitudes, 0.70, and
for perceived brand equity, 0.78. Means, standard deviations, coefficient
alphas, and correlations appear in Table I.
Product/market factors
H1 predicted a negative relationship between stage of a brand's product life
cycle and the planned allocation to advertising vs sales promotion. The
Table II. Beta coefficients from multiple regression analysis for antecedent
hypotheses: dependent variable = advertising percentage/(consumer percentage
+ trade percentage)
multiple regression results indicate that brands in the later phases of the
product life cycle (maturity) tend to have lower budget allocations to
advertising relative to sales promotions than brands in the earlier phases of the
product life cycle (introductory and growth). The beta coefficient is negative
and statistically significant (b = ±0.20, p < 0.01). Hence, H1 is supported.
Positive relationship H2 proposed a positive relationship between brand type (family brands coded
as ``1'' and single brands coded as ``2'') and the budget allocated to
advertising as compared to the budget allocated to sales promotion. The
regression results support this hypothesis (b = 0.19, p < 0.05). Single brands,
on average, have a higher budget percentage allocated to advertising than to
sales promotion compared to family brands.
Organizational/managerial factors
Consumer and trade H5-H7 predicted the relationship between organizational or decision-maker
promotion factors and managers' allocations of marketing communications budgets to
advertising relative to consumer and trade promotion. Table II also presents
the regression results testing these hypotheses. Two of the three
hypothesized relationships are supported by the data.
H5 states that when senior management in the firm is perceived as being
focused on short-term results, brand managers plan to allocate less of their
budgets to advertising relative to sales promotion. The beta coefficient for
this variable was not statistically significant. Hence, H5 is not supported.
H6 posits that as retailers have more influence, brand managers allocate
proportionately less of their budgets to advertising relative to consumer and
trade promotion. The regression coefficient for retail influence is negative
and statistically significant (b = ±0.16, p < 0.05). This result shows that H6 is
supported. As expected, when managers perceive retailers' influence to be
strong, their marketing communications budget has a lower allocation to
advertising relative to sales promotion.
Decision-maker experience H7 predicted that as managers have greater experience with the company,
they tend to allocate proportionately more of their budgets to advertising
relative to sales promotion. The results also support this hypothesis (b = 0.24,
p < 0.01). Decision-maker experience is positively related to the proportion
of budgets allocated to advertising relative to sales promotion.
Outcomes
H8 addressed the relationships between the budget allocation and consumer
attitudes, brand equity, market share change, and profit. A positive
relationship was predicted between the advertising allocation and perceived
consumer attitudes (H8a), brand equity (H8b), and profit (H8d), and a negative
relationship was predicted between the advertising allocation and market
share (H8c). In order to test these hypotheses, we used a median split based
on the previous year's actual budget percentage allocated to advertising to
form two groups of respondents. (Using the prior year's budget allocation
with the current year's outcomes allows us to isolate the lagged relationship
between prior decisions and current outcomes.)
The median for the previous year's actual advertising allocation was 20 per
cent. The high advertising allocation respondents (greater than 20 per cent,
n = 56) had lower average sales promotion allocations, whereas the low
advertising allocation respondents (less than or equal to 20 per cent, n = 57)
had greater average sales promotion allocations. (The total does not equal
165 because of missing data for the multivariate analysis.) This median split
Discussion
A primary objective of this study was to understand how bounded rationality
could contribute to an increased understanding of the continued emphasis on
sales promotion in the marketing communications budget allocation in the
face of concerns about its harmful effects. We examined the relationships
between product/market heuristics and organizational/decision-maker biases
and brand managers' allocations to advertising vs sales promotion. Our study
provides additional insight to the budget allocation decision process by
focusing on brand-level budget allocations, and by including variables that
capture the contextual realities of organizational decision-making. In
addition, we extend existing research by investigating the impact of
communications budget allocations on perceptions of brand outcomes. In the
following sections, we discuss the key findings of our study, suggesting
managerial implications, study limitations, and directions for future research.
Managerial implications
Why do managers continue to spend heavily on sales promotions relative to
advertising, despite emerging evidence that such allocations may lead to
undesirable consequences? By investigating the budget allocation decision
process from the hands-on perspective of brand managers who are at the
heart of the decision, our findings support the bounded rationality predictions
that a combination of product/market and organizational/decision-maker
factors relate to the allocation. Some of these factors are controllable by
management and therefore have direct implications.
Commonly used decision As brands progress through the product life cycle, managers plan to allocate
rules proportionately less of their marketing communications budget to
advertising, and more to consumer and trade promotions. In addition, lower
relative price brands and family brands typically receive an allocation that
emphasizes sales promotion relative to advertising. These product/market
factors appear to be commonly used decision rules that managers rely on in
making their allocation decisions. Given the preponderance of mature
packaged goods brands, low price strategies, and look-alike brand extensions
(Kahn and McAlister, 1997), the continued high sales promotion allocations
are not surprising. Managers looking to increase advertising allocations
Main effect
Relative advertising 0.83 5.54*** 0.17 0.23 10.39** 0.09 0.17 9.78** 0.08 0.22 10.79** 0.09 0.21 4.56* 0.04
allocation
Notes:
* p < 0.05
** p < 0.01
*** p < 0.001
Table IV. MANCOVA results: effects of advertising vs sales promotion allocation on outcomes
Notes
1. The categories for brand type were coded using 1 for family brand, 2 for single product
brand, 3 for a group of single product brands, and 4 for ``other''. The first three categories
made sense to code in a linear fashion, as each brand type increased in uniqueness and
complexity. We determined that coding the ``other'' cases as a 4 was appropriate after
looking closely at the eight cases in this category and noting that these exceptions were a
step higher in complexity and uniqueness of brand type.
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Organizational factors
Retail influence. (Seven-point Likert scale.)
Retailers have no influence in how funds are allocated to the various marketing tools for my
brand. (R)
Short-term perspective. (Seven-point Likert scale) (Coefficient alpha = 0.89).
Top managers repeatedly tell employees that this business unit's survival depends on its short-
term performance.
According to senior managers here, short-term performance is the most important measure of
our business unit's success.
This organization's management is satisfied achieving short-range goals and objectives.
Decision-maker's experience.
Please specify the number of years that you have worked in this company.
Outcomes
Consumer attitudes. (Seven-point Likert scale) (Coefficient alpha = 0.70).
Consumer attitudes, in general, for my brand are very positive.
Consumer attitudes towards my brand, relative to my key competitor(s), are more favorable.
Relative to last year, consumer attitudes for my brand are more positive.
Consumers feel better now about my brand than they have in the past.
Brand equity. (Seven-point Likert scale) (Coefficient alpha = 0.78)
When it comes to brand equity, I would say my brand does pretty well.
My brand's equity is not as strong as I would like it to be (R).
Relative to my major competitors, my brand's equity is solid.
Current market share
The current monthly volume market share for my brand nationally is: (please fill in per cent).
Last year's market share.
My brand's monthly volume market share nationally a year ago was: (please fill in per cent).
(Change in market share computed as the difference between current year's share +100 and last
year's share + 100, to produce an index number.)
Profit
Relative to other brands in my company, my brand's profit performance has been very good
lately. (Seven-point Likert scale.)
Covariates
Market growth rate[6].
Compared to last year, the annual volume sales growth for this brand's product category is:
Decreasing more than 10 per cent/±6 to ±10 per cent/±1 to ±5 per cent/Stable-no growth/
Increasing 1 to 5 per cent/+ 6 to +10 per cent/ Growing over 10 per cent.
Company size
Please circle the one number which best describes the size of your company relative to other
competitors in your industry. (Seven-point scale, anchored by 1 = ``relatively small'',
7 = ``relatively large,'' 4 labeled ``about the same''.)
&