Budget Decisions

Major Decisions in Advertising

Budget Decisions
Establishing the budget
Budgeting approaches
Allocating the budget

Establishing the budget
Marginal Analysis
Sales response models
Additional factors in budget setting
Marginal Analysis
Advertising / Promotion in $
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Point A
Profit
Sales Gross Margin
Ad. Expenditure
BASIC Principles of Marginal
Analysis
Increase Spending . . . IF:
The increased cost is less than the incremental
(marginal) return.
Decrease Spending . . . IF:
The increased cost is more than the incremental
(marginal) return.
Hold Spending Level. . . IF:
The increased cost is equal to the incremental
(marginal) return.

Problems with Marginal
Analysis
Assume that sales are a direct measure of
advertising and promotional efforts.
Assume that sales are determined solely by
advertising and promotion.
Advertising Sales/Response
Functions
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Advertising Expenditures
A. Concave-
Downward
Response Curve
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Advertising Expenditures
Range A Range B Range C
B. S-Shaped
Response
Function
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Factors Influencing
Advertising Budgets
Factors Considered in Budget
Setting
Source: The Advertising Age Editorial Sounding Board consists of 92 executives of
the top 200 advertising companies in the United States (representing the client side)
and 130 executives of the 200 largest advertising agencies and 11 advertising
consultants (representing the agency side).
Budgeting Approaches
Top-down budgeting
Bottom-up budgeting
Top-Down Budgeting
Top Management Sets the
Spending Limit
The Promotion Budget Is Set to Stay
Within the Spending Limit
Top-Down Budgeting
Arbitrary allocation
The affordable method
Historical Method
Percentage of Sales
Competitive parity
Return on investment (ROI)
The Affordable Method
It is used when a company allocates
whatever is left over to advertising.
It is common among small firms and certain
non-marketing-driven large firms.
Companies using this approach dont value
advertising as a strategic imperative.
Logic: we cant be hurt with this method.
Weakness: it often does not allocate enough
money.
Historical Method
Historical information is the source for this
common budgeting method.
The inflation rate and other marketplace
factors can be used to adjust the advertising
amount.
This method, though easy to calculate, has
little to do with reaching advertising
objectives.
Percentage-of-Sales Method
It compares the total sales with the total
advertising budget during the previous year
or the average of several years to compute a
percentage.
Two steps
Step 1: past advertising dollars/past sales = % of
sales.
Step 2: % of sales X next years sales forecast =
new advertising budget.

Percentage-of-Sales Method
Based on (future or past) sales dollar or unit
product cost

Method 1: Straight Percentage of Sales
2007 Total dollar sales
Straight % of sales at 10%
$1,000,000
$100,000
2008 Advertising budget $100,000
Method 2: Percentage of Unit Cost
2007 Cost per bottle to manufacturer
Unit cost allocated to advertising
$4
$1
2008 Forecasted sales, 100,000 units
2008 Advertising budget (100,000*$1) $100,000

Percentage-of-Sales Method
Pros
Financially safe
Reasonable limits
Stable

Percentage-of-Sales Method
Cons
Reverse the cause-and-effect relationship
between advertising and sales.
Stable?
Misallocation
Difficult to employ for new product introductions.
Sales Advertising budget
Competitive-Parity Method
This method uses competitors budgets as
benchmarks and relates the amount invested in
advertising to the products share of market.
Logic: share of media voice share of consumer
mind share of market.
Share of media voice: the advertisers media
presence.
The actual relationship above depends to a great
extent on factors such as the creativity of the
message and the amount of clutter in the
marketplace.
Competitors Advertising
Outlays Do Not Always Hurt
Competitive-Parity Method
Pros
Take advantage of the collective wisdom of the
industry
Spending what competitors spend helps prevent
promotion wars.
Cons
Companies differ greatly.
There is no evidence that budgets based on
competitive parity prevent promotion wars.
(Prisoners Dilemma)
Return on Investment (ROI)
In this method, advertising and promotions are considered
investment, like plant and equipment. Thus, the budgetary
appropriation leads to certain returns.
ROI has received a great deal of attention by practitioners over
the past few years, with many still disagreeing as to how it should
be measured.
Figure 7-18
While the ROI method looks good on paper, the reality is that it is
rarely possible to assess the returns provided by the promotional
effort at least as long as sales continue to be the basis for
evaluation.