Advertising Budget

“I KNOW THAT HALF OF MY PROMOTION BUDGET IS

WASTED BUT I’M NOT SURE WHICH HALF?”

Advertising objectivesA company that advertises usually strives to achieve one of four advertising objectives1. Trial 2. Continuity 3. Brand Switching 4. Switchback

five factors that are considered with setting advertising budget: 1.Stage in the product life cycle – New products typically receive large advertising budgets to build awareness and to gain consumers trial

2. Market share and consumer base: The brands having marker share usually require less advertising expenditure whereas for products without brand need to be built, requires larger advertising expenditure.

3.Competition and clutter: In today’s competitive marker, where there are a large number of competitors, a brand must advertise heavily to heard.

4.Advertising frequency : The number of repetitions that need to be made to built across the brand message to consumers has an important impact on the advertising budget.

5. Product substitutability : Brands in the commodity class require heavily advertising to a establish a different image. For ex , cigarettes , beer soft drinks . Also advertising is important when the brand can offer enquire physical benefits or features

when developing an advertising budget, the amount spent on other tools need to be considered,

A promotion mix, like a media mix , is necessary to reach as much of the target audience as possible.

The advertising budget should be established so as to be congruent with overall company objectives.

Before establishing an advertising budget, companies must take into consideration other market factors.

Promotion budget is based on1. Increasing media costs2. Rise in competition 3. Top management focus on productivity. Managers need to prove every time promotion spending is worth the effort

Purpose of promotion budget1. Check on advertising expenditure.2. Approval from top management3. Balanced focus across products4. Facilitates planned execution 5. Provides direction for campaign planning

6. Selection of media.

Promotion budget tries to answer 1. How much should I spend?2. When should I spend it?3. Where should I spend it?4. What should I spend it on ?

Budget practices in firms 1. Top down approach Purely based on top management discretion. It is subjective and judgmental in nature2. Bottom – up approach It is based on advertising objectives to be achieved.It is objective and data oriented in nature.

Top – down approach

1. Affordability method 2. Arbitrary allocation 3. Percentage of Sales 4. Competitive parity 5. Return on Investment

Bottom - up approach1. objective and task 2. Payout planning3. Quantitative modeling

Top down approach

Affordability Method: All that the company can afford1. budget for other functions . Production and operations budget is fixed. 2. Remaining is apportioned to advertising.

Demerits1. Promotion is an unimportant function.2. No surety whether we are spending enough or more on promotion.

Arbitrary allocation for promotion 1. Residual approach to budgeting 2. No logical formula. 3. Based on top management discretion Demerits1. Advertising objectives are ignored. 2. No systematic thinking.

A percentage of sales1. Budget is based on sales of the product.a) Percentage of total sales b) Unit cost of promotion is calculated and multiplied by total units sold.Variation – Projected sales figures.Accounts for market changes( where no past data is available)

Demerits of this method 1. Considers ad as an expense associated with sales2. Advertising is not an investment. 3. Might lead to stability if industry follows same pattern 4. Difficult for new product intro’s5. Decrease in sales lead to lower budgets.

Competitive Parity MethodFollow the competition 1. Based on competitor’s spending Demerits1. Equal expense – equal effectiveness

2. Objectives and creative executions ignored 3. Ignores company strength4. No guarantee that competitors will follow the same method.

ROI Approach 1. Advertising is an investment2. Returns desired out of promotion DemeritDifficult to figure out monetary returns of advertising

Bottom – up approaches to promotion budgeting4 – Step procedure1. Define communication objective 2. Determine strategies and tasks needed to accomplish them 3. Estimate their costs4. Determine the total budget.

Payout planning 1. Payout plan determines investment value of advertising2. follows a 3 – year plan

-1st Year promotion expenses are high and hence low or negative profits2nd year it goes break-even3rd year it start showing profit

Quantitative modeling1. Computer simulation models 2. Identify all factors contributing to sales 3. Figure out impact of advertising on sales 4. Allocate the budget accordingly.