Advertising Budgeting

Professor Close

Sources:
Cravens and Percy(1998); Murphy, Cunningham and de Lewis
(2011)
 We will discuss these topics of
Advertising Budgeting:

1.Why Crucial

2. The 3 Budgeting Methods

3. Trends in Ad Budgeting

*Note, please refer to advertising

as INVESTING, not spending, in
our class and in your briefs…
why do I say that?
 1. Budget is Crucial
to Ad Strategy
Target Audience

Advertising
Objectives

****Advertising
Budget****

Creative
Strategy

Advertising Media and

Programming Schedules

Implement and Evaluate

Strategy Effectiveness
So, Why is ad or IBP budgeting
crucial?

•Frankly, a company’s success is a

function of its growth in sales and
profits
•What fuels that growth?
ADVERTISING and MARKETING
•This, in turn, sparks WOM (and this
can be free!)
•The economy has ups and downs, as
do specific industries (Note: the soft
drink industry dropped 4% in 2008
when our economy started hurting—so
Pepsi invested $1.2 BILLION 2008-
2011 in a marketing overhaul)
•THINK…..Is this common sense?
Would you advertise more, status quo,
or less when times are tough?
 Tough Times? So,
Re-Allocate to lesser Investments
Which are relatively smaller
investments?

New Media

Direct Advertising
Marketing : TV, Radio,
WOM$ Outdoor,
Print
Personal Sales
Selling Promotion

Event Marketing

Public
Relations
 Your CEO asks you to
propose an ad budget.

How would you calculate the

ad budget?

Why would you pick this

method?
 2. Three Ad/IBP Budget Methods

(I don’t even want to mention the 4th…)

Budgeting Method #1a~The

Percentage of Past Sales Method

A2 = ƒ (S1)

Where:
A2 is the total ad budget for NEXT year
(year 2 or quarter 2)

ƒis a percentage figure

(see NAA industry norms)

S1 is sales for period 1 (or last year’s sales)

Budgeting Method #1b~The
Percentage of Forecasted
Future Sales Method

A2 = ƒ (S2)

Where:
A2 is the total ad budget for
NEXT year (year 2 or
quarter 2)

ƒ is a percentage figure
(see NAA industry norms)

S1 is sales for period 1 (or

last year’s sales)
 Budgeting Method
#1~Percentage of
Sales
Features
• Fixed percent of sales,
often based on past
expenditure patterns.
• Relatively simple (if you
have the information)
• You must calculate ad
allocations as a fixed
percentage of PAST SALES
(e.g., last years’ sales)
• Can help with franchising.
• Note: Peckham’s Formula:
for new products, set S.O.V.
@ 1.5 times your desired
market share two years out
Drawbacks
 Arbitrary.
 Budget may be too high
when sales are high.
 Budget may be too low when
sales are low.
• Ignores long-term effects
• You need benchmarks.
• You need advertising to sales
ratios for the industry (note
these are computed each year
by pro. Ad organizations)
• Industries vary a lot (e.g.,
malt beverages invest 10% of
annual sales on advertising;
movie theatres are closer to
just 1% industry average)
• Note: about 3% is an average
ad 2 sales ratio
 Budgeting Method
#2~Competitive-Parity Method
(I call it the market share
approach…)
ASV = (AF)
______

Ac + AF

Where:
ASV is the firm’s advertising share of voice
(S.O.V) (anyone care to remind us what
S.O.V is?)

AF is the firm’s advertising expenditures

for the period in question

Ac is all competitors’ advertising

expenditures for the period in question

At least, think about a competitive analysis

 LV

Brand 2003 Sales Percent Operating

Billions Change* Margin
Louis Vuitton $3.80 +16% 45.0%

Prada 1.95 0.0 13.0

Gucci** 1.85 -1.0 27.0

Hermés 1.57 +7.7 25.4

Coach 1.20 +34.0 29.9

*At constant rate of exchange **Gucci division of Gucci Group Data: Company reports. BW

LV increased advertising 20% in

2003―spends just 5% of revenues
on advertising―half the industry
average
Cravens and Percy 1998 cited *Business Week, March 22, 2004, 98-102.
 Budgeting Method
#2~Competitive-Parity
Features Drawbacks
 Budgeting Method
#3~Objective and Task

A = ƒ (objectives)
Where:
A is advertising investment
(the firm’s advertising
expenditures for the period
in question)

Objectives are things that

you want to achieve in said
time period (awareness,
trial use, etc.)
 Link Objectives to Budget

 Need Recognition

 Finding Buyers

 Brand Building

 Evaluation of Alternatives

 Decision to Purchase

 Customer Retention

 …Others?
 Budgeting Method #3~
Objective and Task

Features Drawbacks
 Budgeting Method
Recap
(Cravens and Percy and Murphy, Cunningham and de Lewis)
Features
Percentage of Sales
 Fixed percent of sales,
often based on past
expenditure patterns.
 Can help with franchising.
Comparative- Parity
 Budget is based largely
upon what competition is
doing.
Objective and Task
 Set objectives and then
determine tasks (and costs)
necessary to meet the
objectives.
Drawbacks
Percentage of Sales
 Arbitrary.
 Budget may be too high
when sales are high
 Budget may be too low when
sales are low.
Comparative- Parity
 Differences in marketing
strategy may require different
budget levels.
Objective and Task
 The major issue in using this
method is deciding the right
objectives so measurement
of results is important.
Whichever method you
choose, budgets vary
due to:

 Target Market(s)
 Desired Positioning
 Role of Promotion in
Positioning
 Product Characteristics
 Stage of Life Cycle
 Situation Specific Factors
(examples?)
 Which ad or IBP
budget method is
generally a best bet?
Objective
and Task

All You Can Budgeting Percent of

Afford Methods Sales
(note: this (note:
is not a Future or
good idea past)
usually…
Proceed Competitive
with -Parity
caution.
 Ad/IBP Budgeting
I would argue for Objective
and Task, because of the logic
and the strategic approach
with long-term appropriation
and flexibility.

Budget
Allocation

Media/ Creative
Scheduling Strategy
 3. Recent Trends in
Ad/IBP Budgeting
Decisions
• More Promotions/Less Ads
• International Markets mean more
competition and harder to measure market
share
• Clutter. Clutter. Clutter.
• Signaling Theory
• Short-term pressure to brand managers
• Less umbrella branding strategy (more
narrow)
• Advocacy ads
• CSR movement
• Green movement
• Online ads a 25$ BILLION a year industry
(young, mobile, and measurable)
• Experiential/Event Marketing gaining
prominence
Approx. Annual
Expenditures
(billions)

$600
Personal Selling
Sales Promotion
$400 Event Marketing

Advertising

$200