Professional Documents
Culture Documents
• Marginal Analysis
• Sales response models
• Additional factors in budget setting
Marginal Analysis
Ad. Expenditure
$
Profit
Point A
Advertising / Promotion in $
BASIC Principles of Marginal Analysis
A. Concave- B. S-Shaped
Downward Response
Response Curve Function
Little Effect
Initial Spending
High Effect
Middle Level
Little Effect
High Spending
Sales
Sales
• 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
• Arbitrary allocation
• The affordable method
• Historical Method
• Percentage of Sales
• Competitive parity
• Return on investment (ROI)
The Affordable 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
• 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
• 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)