Theoretical approach to Budget

Setting
 Researcher ‘Gary Lilien’ proposes to reflect on three important
issues before making advertising budget decisions:
 1] Economies of Scale – Is there some relevant range in which
increments yield increasing returns?
 2] Threshold Effect: Is there some minimum level of exposure
that must be exceeded for advertising to have a discernable
effect?
 3] Interaction effects: Does advertising interact with each
element of the marketing mix, especially personal selling, to
produce effects that are greater than the sum of their separate
effects?

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The Nature and Types of
Advertising
 Advertising
• Paid non personal communication about an
organization and its products transmitted to a
target audience through mass media
• Promotes goods, services, ideas, images,
issues, people, and
anything else that
advertisers want to
publicize or foster

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Advertising Objectives

 Specific Communication Tasks

 Accomplished with a Specific Target Audience
 During a Specific Period of Time
 INFORMATIVE ADVERTISING – builds
PRIMARY Demand
 PERSUASIVE ADVERTISING – builds
SELECTIVE Demand
 COMPARISON ADVERTISING – compares one
brand to another
 REMINDER ADVERTISING – keeps consumers
thinking about product.
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Advertising
 It's probably the toughest part of any
business. How much to spend, where to
place the ads, how often, what message
to send, and to who?

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 The Five Ms
• MISSION – sales goals, advertising objectives

• MONEY – factors to consider: a) Stage of PLC, b)

Market share and consumer base, c) Competition and
clutter, d) Advertising frequency, and e) Product
substitutability.

• MESSAGE – message generation, message evaluation

and selection, message execution, social-
responsibility. (AIDA?) Know what this is?
(Awareness, Interest, Desire, Action)

• MEDIA – Reach, frequency, impact; Major media

types, Specific Media vehicles, Media timing,
Geographical media allocation.

• MEASUREMENT – communication impact and sales

impact.
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Major Decisions in Advertising
 Objectives Setting
 Budget Decisions:
• a) Message Decisions
• b) Media Decisions
 Campaign Evaluations

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How much to spend?
 The most common answer to this question is,
"How much have you got?" Advertising has a
way of depleting your bank account very
quickly.
 If you asked 100 businesses that question, the
most common answer would be, "a percentage
of gross sales."
 This not only works for advertising but most
other budgets too.

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Advertising Budget Factors that
MUST BE CONSIDERED

 Market Share & Consumer Base

 Competition & Clutter
 Advertising Frequency
 Product Substitutability
 Stage in the PLC (Product Life Cycle)

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General Steps in
Developing and
Implementing an
Advertising
Campaign

FIGURE 19.1
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Percentage of Sales Method
 A specific percentage of that amount is allocated for
advertising.
 Depending on the business this amount may be a daily,
weekly, monthly or quarterly expense.
 The percentage amount will also vary depending on your
profit margins, industry, location and market size.
 Most business operate with an advertising budget of 2-5
percent of their previous years gross sales.
 If you are new in business, you can obtain industry
standards from associations or trade magazines devoted
to your type of business.

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Cont.,
 One of the main reasons most
businesses like this form of budgeting is
the safety factor. Rather than having to
"predict" the future and adjust, they are
always dealing with a "known" amount.

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All-You-Can-Afford Method
 This is the simplest of all methods where
firms decide to spend as much as they
can afford on promoting a brand.
 The company allocates money to
marketing communication after all its
other expenses have been taken care of.
 E.g. new category-creator products for which
the company is not sure how much to spend.

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Unit of Sales Method
 This method is a variation of the
‘percentage of sales 'method. Instead of
taking a predetermined of the rupee
value of sales as a budget,a fixed
amount is taken as budget per unit item
sold in the past or in the future.

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Objective-and-Task method
 Using this method, advertising managers
will set sales objectives they feel are
attainable in the current business
climate.
 Advertising and promotion is then used
as needed to help realize the sales goals
regardless of what happened in previous
years.

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Competitive Parity Method
Many marketing communication managers
spend match the industry average or
spend what their competitors do, either
absolutely in rupee terms or relatively on
the basis of percentage of sales or
market-share.
The method is easy to apply, since competitor
information is readily available through industry and
research publications

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Up side
 The up side is that if the advertising is
done correctly it becomes an investment,
not an expense and can fuel more
advertising at later dates. The company
grows and expands at a faster rate than
it would with the percentage of sales
method.

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Down side
 The down side is that advertising based
on a bad promotion or incorrect
advertising can be very costly. Suddenly
future advertising becomes an expense
not an investment. Costs like this cannot
always be recouped quickly and may
start a downhill slide that can destroy a
company.

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Save money by unadvertised
testing
 Ever go to a store and find an "unadvertised
special?" This is the store's way of testing the waters
for a specific product or service. If the product tests
well, the store can run future ads promoting the product.

 Another advantage: Several products can be tested

against each other and the winners are promoted later
with a greater expectation of success. Service
businesses can test additional services at a discount to
customers when the primary service is purchased at full
price.

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How to budget for an individual
ad
 Advertising is like eating an elephant. It's done in small
bites not one big one. You will run several ads over a
period of time rather than one large ad. How much the ad
will cost depends on the answers to the following
questions.

 All advertising must accomplish a specific definable goal.

What will this ad do for your business? What is the short-
term benefit to the company for running this ad? The
long-term benefit?

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Cont.,
 Is this ad financed by the percentage of sales method or
a sales objective percentage method? What is the dollar
amount allocated to this ad? Co-Op funds available?
What is the expected revenue this ad will produce?
 Are comparable ads being run for competitive products?
What size ads do they use? Can you run similar size
ads?
 What is the specific time period for achieving the
advertising goal?
 What form of evaluation will be used to assure that the ad
is working or not working?

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How to evaluate your ad results
 Advertising that doesn't work is like an
employee that doesn't work...it's costly. You
must be able to track whether the ad is
working or not and why.
 Create a "tracking sheet" for each and every
ad you produce in each type of media. This
sheet will be filed with a copy of each print ad
and the script for each radio or TV ad.
 Each sheet will contain two major tracking
areas.

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First tracking area.
 The history of the ad.
 When was it run?
 What media?
 What days?
 What was the cost of each run?
 What was the cost for the entire run of this ad?
 What amount was paid by co-op advertising, if
any?
 Art and design charges?

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Second tracking area
 The goal of the ad.
 Who was the ad directed toward?
 New customers?
 Regulars?
 Were projected sales met? If so, why?
 Adequate inventory?
 Proper staffing? Weather? Other events that
drew traffic to your area?

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If projected sales were not met
 why?
 Competing sales by competitors? Better
promotions or products available
elsewhere? Conflicting civic events?
Other events that drew traffic out of your
area? Error in the ad? Weather?

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Conclusion
 Advertising doesn't have to be hard. But,
it does require study, testing and
planning. The most important lesson in
advertising that almost everyone misses
is, tracking customer response and
income produced by advertising. Does it
pay to advertise in the media you've
chosen?

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Factors Influencing Budget
Setting
Product: Factors related to the product such as stages in the
product life cycle, product type, complexity of features, brand
differentiation etc. e.g. A newly introduced product needs a large
budget to create awareness and generate trial, similarly if a product
is very complex it needs more explanation and frequent exposure.
Competition: The larger the number of competitors and the
stronger the competition the more a brand has to spend to make
even a little noise.
Market Share: The size and nature of a product market and the
company’s goal influence its budget. e.g. Budget requirements for a
soft drink market are higher than the tyre market. Often boom and
recession conditions also affect communication spending.

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Factors Influencing Budget
Setting cont.......
Distribution System: Longer channels increase the number of
consumers that a company has to reach through communication. E.g.
FMCG products have to communicate to stockists, wholesalers,
retailers besides the end user.
Sales Decay Rate: This is the rate at which consumers can forget
the product or its advertising. e.g. If a product does not fulfill a real
need, does not have much aspirational value etc.
Unexploited Sales Potential: Higher the available sales
potential,higher the need for advertising to tap it. Pioneer brands tend
to advertise more since they want to capture as much of the market as
possible before their rivals follow suit.

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Any Queries…?

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