BUDGET SETTINGS

MONEY TALKS

 No, theres no formula But there is a procedure

Budget setting process starts with definition of the market one is operating in e.g. Is Iodex in the balm market or the market for pain relievers (including pills) ?

 The broader the market we compete in, the larger the advertising budget
e.g. Advertising to women only may cost less than reaching all adults Targeting only Metros / State Capitals costs less than national plan

How important is advertising ?

Does it play a major part in determining sales / market share ? OR

Is it a relatively small part of the marketing mix ?

What is the current market situation ?

Evaluate requirements compared to competition

Market leader can maintain shares by spending less than competitors Minor brands must spend proportionately more than higher placed brands

Method of Budget Setting

Affordable Inertia Media Inflation Multiplier A to S / A to M ratio Matching Competition SOV v/s SOM Dynamic Difference Objective and Task Experiments Modeling

The Affordable method

Ad budget = Revenue - Other costs

Shake the budget and take whats loose

 Pros :

Ad budget affordable No major items of total budget threatened

Cons :
No account taken of ads effect on sales or of changes in environment

The Inertia Method

If it aint broke, dont fix it Maintain last years budget; even if budget changed, some aspect of the plan remains the same, e.g. GRPs

 Pros :

Simplicity If advtg. Is working, likely to do so next year also

Cons :
If inflation ignored, leads to steadily reducing effects Company objectives advtg. effects and changes in environment not taken into account

Media Inflation Multiplier

Often used in combination with Inertia Method A budget agreed to up to a point multiplier by the estimated increase in media costs Multiplier can be rate of inflation in CPT or can be calculated on the basis of last years schedule being costed at this years rates (thereby maintaining GRPs)

 Pros :
If effects of advertising have been good, these get repeated as the weight is maintained

Cons :
Removes incentive to improve efficiency in other ways such as negotiation or re-evaluation of vehicles on the basis of cost efficiency

Advertising to Sales (A/S)

Ad budget expressed as percentage of sales revenue (targeted or past sales )

 Pros :

Easy to use Successful brands get more support Accounts for change in selling price

Cons :
A sale maintenance strategy Advtg. becomes result of sales rather than cause Superior products get better, weaker ones remain weak

A/S for leading brands

%

Sunsilk Lux Colgate Red Label Complan DFT

3.9 2.6 4.6 3.0 8.4 0.5

A/S for leading companies

%

Hindustan Lever ITC Nestle Godrej Soaps Broke Bond P&G Colgate Palmolive Bausch & Lomb

3.2 0.9 5.2 5.8 3.4 13.5 4.2 22.7

Matching Competition

Copy competitors in terms of ad spends or A/S ratios or GRPs This becomes task against which budget is set

 Pros :

Easy to use Easily defended to top mgmt Directs attention to competitors ad activities

Cons :
Assumes competitors spending right amount Ignores effects of advtg. On sales Hard to forecast competitors spend levels

SOV v/s SOM

Expresses ad budget as share of category spend and examines its relationship with market share Size of brand strongly associated with difference between SOV and SOM; large brands can spend proportionately less

 Pros :

Positions ad budget competitively Allows brand to react to competitive changes in environment Places realistic perspective on advertising expectations

Cons :
Assumes direct relationship between SOV / SOM Does not account for chance factor

John Philip Jones

Data about brands in 23 countries collected; all brands in packaged goods categories At least 4 advertised brands per category near oligopoly conditions 666 brands in 117 categories considered

John Philip Jones

Brands grouped into families covering 3 percentage points of market share
For each brand, difference between SOV and SOM calculated and averaged within brand family For small brands, SOV >> SOM For large brands, SOV 5% or more below their SOM

Advertising-Intensiveness Curve
Advertising-Intensive Curve
6
SOV above or below SOM (percentage points)

4 2 0 -2 -4 -6 Share of Market (%age)

Dynamic Difference
Based on historical data on SOV and SOM

Y : SOM this year - SOM last year X : SOV this year - SOM last year (dynamic difference)
Mark these on scatter plot

TEN YEARS DATA

SOM 1 - SOM 20 1 0

(1)
(2)

(3)
(20) (15) (10) (5) (0) % 5 10 SOV 1 - SOM 0

Dynamic Difference
To note :
Point above Y- axis (increasing SOM) ? Points to right of X - axis (SOV > SOM) ? Strong association of Dynamic Difference with increase in SOM ? Possible to draw upward sloping line through the points ?

Dynamic Difference
General trends established; exceptional points can be probed further Can be used to determine next years SOV level basis projected SOM

Objective and Task Method

Marketing and advertising objectives starting point Define task to be done in accomplishing these objectives Cost of task is budget to be set JWT Frequency Estimators is a tool used to determine the magnitude of the task

 Pros :

Budget for specific goals Advtg. Seen as result-oriented Encourages campaign evaluation

Cons :
Method may ignore affordability Goal set partly because it is measurable, partly because we hope that achieving the task will meet the objective. We may be wrong

Effective Frequency
Three key factors
In the target group What is the frequency required for the marketing task? What should be the time period?

Effective Frequency : A Budgeting Tool

The process
Define target group Define campaign objectives Set effective frequency targets Set effective reach targets/ cross check against competition Arrive at advertising weights Translate advertising weights to SOV and cross check against competition

Time Period
For FMCG freqoently purchased brands, purchase cycle weekly or monthly For other categories, over a longer period of time

Special Cases
New product - No historical data; methods such as Inertia, Media Inflation Multiplier, Dynamic Difference not applicable

New Products
Methods
Fixed amount based on in-company norms or other launches Match budget / GRP levels Experiments Affordability Peckhams Method

Peckhams Formula
Estimate SOM at end of year 2 Set budget so that Avg SOV over Years 1,2 is at least twice the estimated SOM
Ratios less than 2 for distinctive, first-incategory products Ratio higher for undifferentiated brands-

Special Cases
Budget allocation for portfolio of brands
Elasticity of each brands to advertising Else, rank brand basis Unit / Adspends Brand with highest rank gets greater proportion of budget

Modelling
Based on historical data Sales / SOM regressed against Adspend, SOV, Price, Promotions, etc. This gives a multi-variate equation Weakness
collection of reliable data

Experiments
Keeping other factors constant, alter advtg, weight deliberately in one market Examine changes in SOM and brand recall vis--vis a matched market

Budget Setting : JWT Approach

Pragmatic Not based on any one method Establishing a baseline to suit circumstances

JWT 5 Point Plan

Establish a baseline
What is the norm for the brand ?

Modify the baseline

Use past experience / expectation

What range of budgets emerge ? What are the likely results of each alternative ?
SOM / Sales / Profits / Contribution

How can we get better evidence for next year

Establish a baseline
Brand operates in stable environment
use previous expenditures as baselines

Brand is new / past expenditure misleading

use competitors spend relative to SOM

Totally new type of product

use other new brand launches in similar markets

Modify the baseline

Internal Factors :
Strategy
Market share objective New users of the brands Investing / maintenance / milking

Brand
Functional change Perceived value

Priorities
Aggressive / defensive

Modify the baseline

External Factors : The market
More / less competition Likely developments

The media
Media rates / relative value New media Media events e.g. Olympics, World Cup

Practical Approach
Work out the budget required based on different methods Compare and decide on the spend

What range of budgets emerge ?

Whats affordable SOV v/s SOM A to S Ratio Objective and Task

Thank You