SESSION 12

SETTING OUT BUDGET

SESSION OUTLINE

Every program and activities performed by the company requires budget

allocation. Advertising and promotion are no exception. Before the fiscal year the
marketing department and the advertising department sit down together to
discuss budget allocation for all advertising and promotion activities.

The basis of budget calculation are based on many factors such as objectives,
target sales, and market data such as expenditures of direct competitors.
This chapter will described the many methods for setting advertising and
promotion budget.

OBJECTIVES:

 To understand how budget are set based on promotional plans: objectives

and strategies.
 To understand the various ways of setting up budget

Setting up budget and budget period

All program and activities to be carried out in a fiscal year must be carefully
established and approved by senior management of the company. Budget are
based on past performance and forecast of future sales and the number of tasks
to be carried out within the budget period.

The budget period is usually a year, normally the financial year of the
organization. Budgets are therefore prepared by the advertising department and
other departments towards the end of each financial year and approved by the
board of directors ready for the next year.

In setting up the advertising budget, the Advertising Manager/Promotion

Manager relies on several information. One is information from the sales
department indicating sales achievements and also problem areas. Other
information is market research from the marketing department which provides
information on market trends, consumer behavior, competitor’s activities, etc.

Methods of setting up budget

 Objective task method

 Historical method
 Percentage past sales/future sales method
  Competitor parity/market share method
 Affordability method
The above methods can be used in combination as the aim is to a structured
table of expenditure so that the promotional plan can successfully managed.

The objective task method

This method requires the setting up of advertising and promotional objectives,

and then putting sums of money against all that needs to be carried out to
achieve the objectives.
Therefore the steps in using this method are:

 Set up advertising/promotion objectives

 Decide what promotion activities to be carried out to achieve the
objectives
 Set up the budget.

Historical method

The historical method is based on advertising and promotion spending of the

previous years. A percentage may be added to cover inflation and will be added
if there are extra activities, for example using more media to extend media
coverage.

Percentage of past sales method

This method is based on the idea that if a product sold well in previous years
then it should be supported for future years. Alternatively stated, it is a way of
maintaining sales at the previous year’s level. The idea works well if the product
is growing and reaching saturation, but not if it has reached maturity or is in
decline and needs abandoning or bolstering. There is also a danger that, if the
product is becoming successful, it may sell well in any case, but this is a difficult
decision that needs the joint deliberations of the marketing manager, the sales
manager and the advertising manager.

Percentage of future sales method

This method is based on predicting the volume of sales that is likely to be

achieved. This is not simply guesswork but based on market research and
scientific forecasting,
Deciding on percentage.

There is no magic formula to be used, but based on discussion and deliberation

of the senior management. A fast moving consumer product with heavy
competition may spend more than 15% of its sales on promotion. A leading
brand may spend less, but because of high volume of sales, a small percentage
will represent a large amount of money.

Competitor parity/market share method

One of the most important responsibility of the advertiser is to monitor

competitive brands promotional activities. He can access this information by
purchasing advertising expenditure data.

However it is not always a good idea to let your rival dictate your advertising
expenditure, especially if similar media strategy is followed. Directly competing
brands do not have exactly the same market characteristics, thus lending to
different advertising objectives and strategy. Moreover, if the competing brand
has bigger market share, it is definitely not wise to have the same expenditure.

Therefore, competitor’s expenditure is to be used as a guide in setting up the

advertising budget.

The affordable method

The affordable method is simply a decision made by a senior member of the

board, such as the finance director, without the need to consult with the
marketing or sales department.

This method is rarely used anymore, especially if the company is marketing

oriented. This method may be used for a new company or new product, where
promotion costs will be calculated like any other activity in the company.
Agency Remuneration and Recognition

As a service provider, an advertising agency’s reputation is one of its selling

point. For an agency reputation means that it is recognized not only for its work,
but also for other specific and technical aspects of the business.

Agency recognition and criteria for recognition

The most important recognition to an agency is that by the media houses. Good
business relations with the media is very important for the agency to carry out its
commitment to its clients. The media must be sure that the agency has a
substantial financial strength to pay the media services used by the agency on
behalf of its clients. Once recognized by the media, agency will receive many
privileges from the media houses, such as longer credit terms, more discounts
and bonuses.

To obtain recognition, the agency applies for membership in a recognized trade

associations. Persatuan Perusahaan Periklanan Indonesia (PPPI is one such
organization. Another assurance is the agency’s clients list and track record in
credit payment. If the agency caters to high profile and big spender client
companies, it reflects the agency’s financial strength and reputation, as it is safe
to assume that high profile clients will choose to work with reputable agencies.

Agency income ( remuneration )

The commission system

The commission system is based on above the line media expenditure. In the
agency –client contract/agreement, it is decided the percentage the agency will
receive from the client’s above the line expenditure. When using this system,
media discounts are rebated to client.
Example

Rate card price: Rp 10.000.000

Discount 20%: Rp 2.000.000
Cost after disc Rp 8.000.000
Agency com 15% on gross Rp 1.500.000
Cost to client Rp. 8.000.000 + rp 1.500.000 = rp 9.500.000

In this case the agency is entitled for 15% (if this is the % agreed on the agency-
client contract) on gross media costs.
Agency fee

The fee system is income generated by agency for their time and skills,
especially as nowadays many agencies operate increasingly like consultants
advising their clients on marketing communication strategies. Advertisers may
accept the fee system if they in turn receive objective and expert advice from
their agencies resulting in agency-client relationship based on trust and mutual
benefits.

Handling charges or “mark-ups”

Handling charges usually applies for below the line activities and production of
advertising materials. For this type of work, agencies usually assigned a third
party, and the mark up is calculated based on a certain percentage of the costs
submitted by the supplier. For instance:

Printing cost Rp 10.000.000

Mark up 15% Rp 1.500.000
Cost to client Rp 11.500.000

The handling fee “mark up” covers the agency time and expertise in overseeing
the work done by the supplier, thus ensuring satisfactory result.

Variation on the commission and fee system

The payment system described above can take any combination. When the
agency provides full service, all 3 may be used.: the commission system for
media services, fee system for consultation and concept development and mark
ups for jobs where agency supervision of third party are required such as in
producing advertising and other promotion materials.
Points to remember

Dear students,
Write the most important points you want to remember about this session