Advertising

management

Session 7:Advertising Budget

Term: VI
Session 7:Key Takeaways
Advertising Budget
• Case for vs against
• Theoretical concerns

Top-Down vs. Bottom-Up Budgeting approaches

Top- Down approaches

• Affordable Method
• Arbitrary Allocation
• Percentage of Sales
• Competitive Parity,
• ROI

Bottom-up approaches: Objective-and-task method

Share of Voice effect method.

 Establishing and Allocating
the Promotional/ advertising
Budgets
 Establishing & Allocating the Promotional Budget

Sponsorship Direct
Underwriting Marketing

Public Group Sales

Relations

Sales Internet
Promotions

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Advertising Budget

Advertising budget is a financial document that

shows the total amount to be spent on
advertising
Translation of an advertising plan into monetary
units

Prepared by the advertising manager in

consultation with the marketing manager
Establishing the Advertising Budget: Case for
vs against
• Case Against
• Fail to realize the value of
advertising and promotion
• Communications budget
as an expense
• Budget expenses as
cutting into profits.
• In tough times, the
advertising budget is the
first to be cut
McGraw-Hill/Irwin
• Case For
• View a rupee spent as
contributing to additional
sales and market share
• There are evidences that
in tough times, the
advertising budget should
be raised
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Establishing a Budget: Theoretical issues

Sales Response
Marginal Analysis
Models
 Marginal analysis

Source: Belch and Belch, Advertising and Promotion

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Budget Adjustments

Increase
Increase If
If the
the cost
cost is
is less
less than
than the
the
Spending
Spending marginal
marginal return
return

Hold
Hold If
If the
the cost
cost is
is equal
equal to
to the
the
Spending
Spending incremental
incremental return
return

Decrease If
If the
the cost
cost is
is more
more than
than the
the
Decrease incremental
Spending
Spending incremental return
return

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Assumptions for Marginal Analysis

Sales are a Sales are the

direct measure principal
of advertising objective of
and promotions advertising and
promotion
efforts

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Sales Response Models
A. Concave-Downward B. S-Shaped Response
Response Curve Function

Incremental Sales

Incremental Sales

Initial Spending

High Spending
Middle Level

Little Effect
Little Effect

High Effect
Range A Range B Range C
Advertising Expenditures Advertising Expenditures
Source: Belch and Belch, Advertising and Promotion

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Factors Influencing Advertising Budgets

Product Hidden product

life cycle qualities

Product Product
durability price

Purchase
Differentiation frequency

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Top-Down vs. Bottom-Up Budgeting approaches

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Top-Down Budgeting Methods

Affordable
Affordable
Method
Method

Return
Return on
on Arbitrary
Arbitrary
Top
Top
Investment
Investment Allocation
Allocation
Management
Management

Competitive
Competitive Percentage
Percentage
Parity
Parity of
of Sales
Sales

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Affordable method

All you-can-afford method

Firm determines the amount to be spent on the various areas

such as production and operations and then allocates.

What is left is allocated to advertising and promotion.

 Arbitrary allocation

Budget is set by management based on

what is felt to be necessary.

Concerns
• No theoretical basis underlies the budgeting process.
• No systematic thinking
• No criteria set
• Based upon intuition or judgment
 Percentage of sales

Advertising and promotion budget is based on the sales of product.

Determined by taking either a percentage of

• actual sales, or
• anticipated revenue from sales.

Two method
• Straight percentage of sales
• Percentage of unit cost
 Disadvantages

Basic premise on which the budget is established: sales.

Does not allow for changes in strategy either internally or from

competitors.

Difficult to employ for new product introductions.

Decreases in sales will lead to decreases in budgets.

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Competitive parity

Setting budgets on the basis of what competitors spend

Matching the same percentage of sales expenditures as

competitors.

Disadvantages
• Ignores individual company objectives
• Competitors might change method
 Return on investment

Advertising and promotions are considered as

investments

Budget appropriation is based on the returns the

company feels it will generate from advertising
 Bottom-up approach-
Object-and-task method
 Object and Task Method

Isolate
Isolate objectives
objectives

Determine
Determine tasks
tasks required
required

Estimate
Estimate required
required expenditures
expenditures

Monitor
Monitor

Reevaluate
Reevaluate objectives
objectives

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Payout Planning

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Share of Voice Effect

Share of Voice
Decrease–find
Decrease–find aa

High
Competitor’s
Increase
Increase to
to defend
defend
defensible
defensible niche
niche

Attack
Attack with
with large
large Maintain
Maintain modest
modest
SOV
SOV premium spending
spending premium
Low

premium premium

Low High
Your Share of Market

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Organizational Characteristics

• Factors that influence advertising budgets

• The organization’s structure
• Power and politics
• The use of expert opinions
• Characteristics of the decision maker
• Approval and negotiation channels
• Pressure on senior managers to arrive
at the optimal budget

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Suggestive Reading

Chapter 7, Belch: Advertising and Promotion, Sixth Edition, ©

The McGraw−Hill Companies, 2003.

Also refer to :

Chapter 16, Setting media budgets, Fifth edition, Batra, Myers,

and Aaker, Fifth edition.