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HSS012 ADVERTISING MEDIA SERVICES

UNIT 2 –BUDGET DECISION PROCESS IN


ADVERTISING
PREPARED BY
Mr.T.Raj Pradeesh
ASSISTANT PROFESSOR
DEPARTMENT OF MECHANICAL ENGG
KARE
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

Sales Gross Margin


Sales in

Ad. Expenditure
$

Profit

Point A
Advertising / Promotion in $
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

A. Concave- B. S-Shaped
Downward Response
Response Curve Function

Little Effect
Initial Spending

High Effect
Middle Level

Little Effect
High Spending
Sales
Sales

Range A Range B Range C


Advertising Expenditures
Advertising Expenditures
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 don’t value advertising as a strategic
imperative.
• Logic: we can’t 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 year’s 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 $1,000,000
Straight % of sales at 10% $100,000
2008 Advertising budget $100,000
Method 2: Percentage of Unit Cost
2007 Cost per bottle to manufacturer $4
Unit cost allocated to advertising $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
product’s share of market.
• Logic: share of media voice → share of consumer mind
→ share of market.
• Share of media voice: the advertiser’s 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.

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