Budget Decisions
Major Decisions in Advertising
Budget Decisions
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Establishing the budget
Budgeting approaches
Allocating the budget
Establishing the budget
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Marginal Analysis
Sales response models
Additional factors in budget setting
Marginal Analysis
Gross Margin
Sales in
$
Sales
Ad. Expenditure
Profit
Point A
Advertising / Promotion in $
BASIC Principles of Marginal
Analysis
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Increase Spending . . . IF:
The increased cost is less than the incremental
(marginal) return.
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Decrease Spending . . . IF:
The increased cost is more than the incremental
(marginal) return.
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Hold Spending Level. . . IF:
The increased cost is equal to the incremental
(marginal) return.
Problems with Marginal
Analysis
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Assume that sales are a direct measure of
advertising and promotional efforts.
Assume that sales are determined solely by
advertising and promotion.
Advertising Sales/Response
Functions
B. S-Shaped
Response
Function
Sales
High Spending
Little Effect
Middle Level
High Effect
Advertising Expenditures
Initial Spending
Little Effect
Sales
A. ConcaveDownward
Response Curve
Range A Range B Range C
Advertising Expenditures
Factors Influencing
Advertising Budgets
The Dorfman-Steiner Condition
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The firm is a monopoly.
Demand function: Q = D(P, A), where P is the
price and A is the advertising budget.
Profit function: π = (P – C)Q – A = (P – C)
D(P, A) – A, where C is the marginal
production cost.
εP: the price elasticity of demand; εA: the
advertising elasticity of demand.
In the equilibrium, A/Sales = εA/εP.
Factors Considered in Budget
Setting
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Source: The Advertising Age Editorial Sounding Board consists of 92 executives of
the top 200 advertising companies in the United States (representing the client side)
and 130 executives of the 200 largest advertising agencies and 11 advertising
consultants (representing the agency side).
Budgeting Approaches
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Top-down budgeting
Bottom-up budgeting
Top-Down Budgeting
Top Management Sets the
Spending Limit
The Promotion Budget Is Set to Stay
Within the Spending Limit
Top-Down Budgeting
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Arbitrary allocation
The affordable method
Historical Method
Percentage of Sales
Competitive parity
Return on investment (ROI)
The Affordable Method
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It is used when a company allocates
whatever is left over to advertising.
It is common among small firms and certain
non-marketing-driven large firms.
Companies using this approach don’t value
advertising as a strategic imperative.
Logic: we can’t be hurt with this method.
Weakness: it often does not allocate enough
money.
Historical Method
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Historical information is the source for this
common budgeting method.
The inflation rate and other marketplace
factors can be used to adjust the advertising
amount.
This method, though easy to calculate, has
little to do with reaching advertising
objectives.
Percentage-of-Sales Method
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It compares the total sales with the total
advertising budget during the previous year
or the average of several years to compute a
percentage.
Two steps
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Step 1: past advertising dollars/past sales = % of
sales.
Step 2: % of sales X next year’s sales forecast =
new advertising budget.
Percentage-of-Sales Method
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Based on (future or past) sales dollar or unit
product cost
Method 1: Straight Percentage of Sales
2010
Total dollar sales
Straight % of sales at 10%
2011
Advertising budget
$1,000,000
$100,000
$100,000
Method 2: Percentage of Unit Cost
2010
Cost per bottle to manufacturer
Unit cost allocated to advertising
2011
Forecasted sales, 100,000 units
2011
Advertising budget (100,000*$1)
$4
$1
$100,000
2007 Advertising-to-Sales
Ratios by Industry Sector
Percentage-of-Sales Method
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Pros
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Financially safe
Reasonable limits
Stable
Percentage-of-Sales Method
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Cons
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Reverse the cause-and-effect relationship
between advertising and sales.
Stable?
Misallocation, e.g. S-shaped curve.
Difficult to employ for new product introductions.
Sales↓ → Advertising budget↓
Competitive-Parity Method
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This method uses competitors’ budgets as
benchmarks and relates the amount invested in
advertising to the product’s share of market.
Logic: share of media voice → share of consumer
mind → share of market.
Share of media voice: the advertiser’s media
presence.
The actual relationship above depends to a great
extent on factors such as the creativity of the
message and the amount of clutter in the
marketplace.
Competitive-Parity Method
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市場占有率法
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廣告預算＝競爭對手的廣告費用／競爭對手的市占
率×本企業預期市占率
增減百分比法
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廣告預算＝本企業去年廣告費×（1±競爭對手廣告
費增減率）
Competitors’ Advertising
Outlays Do Not Always Hurt
Competitive-Parity Method
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Pros
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Take advantage of the collective wisdom of the
industry
Spending what competitors spend helps prevent
promotion wars.
Cons
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Companies differ greatly.
There is no evidence that budgets based on
competitive parity prevent promotion wars.
(Prisoners’ Dilemma)
Prisoner’s Dilemma
Player 1 ╲ Player 2
Cooperate
Fink
Cooperate
2, 2
-3, 3
Fink
3, -3
-2, -2
1. In 1981, American Airlines first
introduced the AADVANTAGE frequentflier program. When other airlines
copied this strategy, did they engage in
the prisoner’s dilemma?
2. How can a firm escape from
the prisoner’s dilemma?
Return on Investment (ROI)
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In this method, advertising and promotions are considered
investment, like plant and equipment. Thus, the budgetary
appropriation leads to certain returns.
ROI has received a great deal of attention by practitioners over
the past few years, with many still disagreeing as to how it should
be measured.
Aegis Rated ROI of Various Media
While the ROI method looks good on paper, the reality is that it is
rarely possible to assess the returns provided by the promotional
effort – at least as long as sales continue to be the basis for
evaluation.
Bottom-Up Budgeting
Total Budget Is Approved by
Top Management
Cost of Activities are Budgeted
Activities to Achieve Objectives
Are Planned
Promotional Objectives Are Set
Bottom-Up Budgeting
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Objective and Task Method
Payout Planning
Quantitative Models
Objective and Task Method
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It looks at the objectives for each activity and
determines the cost of accomplishing each
objectives.
Three steps:
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Defining the communications objectives to be
accomplished
Determining the specific strategies and tasks
need to attain them
Estimating the cost associated with performance
of these strategies and tasks
Objective and Task Method
Establish Objectives
(create awareness of new product among
20 percent of target market)
Determine Specific Tasks
(advertise on market area television and
radio and local newspapers)
Estimate Costs Associated with Tasks
(television, $575,000; radio, $225,000;
newspaper, $175,000)
Objective and Task Method
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The major of advantage of this method is that the
budget is driven by the objectives to be attained.
The major disadvantage of this method is the
difficulty of determining which tasks will be requires
and the costs associated with each.
This method is not as easy to perform or as stable
as some of the methods discussed earlier.
It is especially difficult for new product introduction
(There is no past experience to use as a guide).
Payout Planning
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The first months of a new product’s introduction
typically require heavier-than-normal advertising and
promotion appropriations to stimulate higher levels
of awareness and subsequent trial.
The average share of advertising to sales ratio
necessary to launch a new product successfully is
approximately 1.5~2.0.
This means that a new entry should be spending at
approximately twice the desired market share.
Share of Advertising/Sales
Relationship
Share of Advertising/Sales
Relationship
Payout Planning
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The basic idea is to project the revenues the
product will generate, as well as the costs it
will incur, over 2 to 3 years.
Based on an expected rate of return, the
payout plan will assist in determining how
much advertising and promotions expenditure
will be necessary when return might be
expected.
Payout Planning
To determine how much to spend,
marketers develop a payout plan that
determines the investment value of the
advertising and promotion appropriation
Example of a three-year payout plan ($ millions)
Product sales
Profit contribution
(@$.50 per case)
Advertising/promotions
Profit (loss)
Cumulative profit (loss)
Year 1
15.0
Year 2
35.50
Year 3
60.75
7.5
15.0
(7.5)
(7.5)
17.75
10.50
7.25
(0.25)
30.38
8.50
21.88
21.63
Quantitative Models
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For the most part, these methods employ
computer simulation models involving
statistical techniques such as multiple
regression analysis to determine the relative
contribution of the advertising budget to sales.
Attempts to apply quantitative models to
budgeting have met with limited success.
Such methods do have merit but may need
more refinement before achieving
widespread success.
Allocating the Budget
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Allocating to IMC elements
Client/agency policies
Market size
Market potential
Market share goals
Economics of scale in advertising
Organizational characteristics
Allocating to IMC Elements
Allocating to IMC Elements
廣告費用分配比率表
費用項目
費用比率
媒體購買費
80% - 85%
廣告製作費
5% - 15%
廣告研究費
5%左右
廣告與其他活動的協調費用
2% - 7%
High
Low
Competitor’s
Share of Voice
Share of Voice Effect
Decrease–find a
defensible niche
Increase to defend
Attack with large
SOV premium
Maintain modest
spending premium
Low
High
Your Share of Market