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BBA|mantra Advertising Budget – Objectives, Approaches, Methods bbamantra 12 months ago

Advertising Budget – Objectives, Approaches, Methods

BBA|mantra Advertising Budget – Objectives, Approaches, Methods bbamantra 12 months ago

bbamantra

12 months ago

BBA|mantra Advertising Budget – Objectives, Approaches, Methods bbamantra 12 months ago

Direct action advertising(ii) Communication objective – The objective is to create awareness, develop interest or to change

(ii) Communication objective – The objective is to create awareness, develop interest or to change an attitude. For this purpose a business may choose to –

Increase the % of target customers who associate a special feature or bene t with company’s brand t with company’s brand

Increase number of customers who prefer company’s brand over competing brandsa special feature or bene t with company’s brand Increase company’s brand usage among existing members

Increase company’s brand usage among existing memberscustomers who prefer company’s brand over competing brands Encouraging a brand trial among targeted customers Basis

Encouraging a brand trial among targeted customersIncrease company’s brand usage among existing members Basis of Advertising Budget The various factors that have

Basis of Advertising Budget

The various factors that have to be studied before setting the advertising budget are –

Market size and Potentialto be studied before setting the advertising budget are – Product life cycle stage Market share

Market shareare – Market size and Potential Product life cycle stage Intensity of competition Advertising frequency Product

Intensity of competitionsize and Potential Product life cycle stage Market share Advertising frequency Product di erentiation strategies

Advertising frequencylife cycle stage Market share Intensity of competition Product di erentiation strategies Many businesses

Product di erentiation strategies erentiation strategies

Many businesses consider advertising as an expense rather than an investment, hence it is important to use a theoretical basis and budget allocation methods to make an e ective advertising budget.

The Theoretical basis for creating an advertising budget is Economic Marginal Analysis. According to Economic Marginal Analysis a rm should continue to increase its advertising budget for a particular brand or for a certain target market as long as the (MR) Marginal Revenue exceeds the Incremental Expenditure (IE). However this basis takes into account the two assumptions which are:

Advertising is solely responsible for sale Advertising is solely responsible for sale

Sales are a direct result of advertising and the deviation can be measured accurately Due

Sales are a direct result of advertising and the deviation can be measured accurately

Due to these assumptions this model is rarely used as it is not practical to that assume advertising alone determine sales as there are many other environmental factors that a ect sales.

Most advertiser support one of two models of advertising to sales response function namely the Concave downward function or the S-shaped function.

the Concave downward function or the S-shaped function. Picture Credits: Advertising and Sales Promotion –

Concave downward function curve – As the amount of advertising increases it incremental value decreases following the law of diminishing marginal utility i.e. advertising e ects start diminishing quickly. Hence less advertising money may needed for optimum sales.

S-shaped function curve – Initial expenditure on advertising has a very little e ect on sales. After a certain point increment in advertising expenditure lead to increased sales but the gain in sales continue only up to a point and after that there is no e ect on increased expenditure on sales. Hence it suggests that less budget has a minimal impact and a high budget may not necessarily have a high impact.

Advertisers must advertise and spend in the area of rising curves where maximum return on advertising expenditure can be accomplished.

Approaches to Advertising Budget

Approaches to Advertising Budget

Top Down Approach

Top management sets the spending limit

Advertising budget is set within the allocation limits.

Advertising objectives and activities are planned according to the set budget.

It is a Judgmental Approach

Budget is not linked to the objectives.

This leads to predetermined budget allocations which are not related to advertising objectives.

Methods – A ordable Method, Arbitrary Allocation, Percentage of Sales, Competitive parity, Return on investment

Methods of Advertising Budget

Build Up Approach

Advertising objectives are set

Activities necessary to achieve objectives are planned

Total advertising budget is approved by top management

Budget is allocated on the basis of activities considered essential to accomplish the objectives.

Methods – Objective and Task Method, Payout Planning, Quantitative Approach, Experimental Approach

(i) The a ordable method – All you can a ord

It is a simple method

It

is a simple method

Whatever is left out of the nancial budget is allocated to advertising

Whatever is left out of the nancial budget is allocated to advertising

After making all business expenditures the amount left is allocated to advertising

After making all business expenditures the amount left is allocated to advertising

No consideration is given to advertising objectives or goals

No consideration is given to advertising objectives or goals

Chances of over or under spending are high

Chances of over or under spending are high

A common method in small rms or rms with primary focus on new

A

common method in small rms or rms with primary focus on new

product development

(ii) Arbitrary Allocation Method

There is no theoretical basis of creating a budget

There is no theoretical basis of creating a budget

Budget is allocated on the basis of what is felt necessary by decision makers

Budget is allocated on the basis of what is felt necessary by decision makers

It lacks systematic thinking

It

lacks systematic thinking

There is no relationship with advertising objectives

There is no relationship with advertising objectives

Managers believe that some amount must be spent on advertising and pick up a gure

Managers believe that some amount must be spent on advertising and pick up a gure

(iii) Percentage of sales method –

It is a commonly used method by large and medium sized companies

It

is a commonly used method by large and medium sized companies

Budget allocated depends upon the total sales gure i.e. high sales = high budget, low

Budget allocated depends upon the total sales gure i.e. high sales = high budget, low sales = low budget

The basis of budget allocation is the total sale of brand or product. It may

The basis of budget allocation is the total sale of brand or product. It may be:

A xed percentage of last year’s sales gure is allocated as the budget.

A xed percentage of last year’s sales gure is allocated as the budget.

A xed percentage of projected sales gures of the next year

A xed percentage of projected sales gures of the next year

A xed amount of the unit product cost is taken as advertising expense

A xed amount of the unit product cost is taken as advertising expense

and multiplied by the number of projected sales unit.

Advantages

expense and multiplied by the number of projected sales unit. Advantages It is simple, straight forward,

It is simple, straight forward, easy to implement

Expenditures are directly related to funds available.Disadvantages It ignores that less advertising may decline sales or potential of advertising in rising

Disadvantages

It ignores that less advertising may decline sales or potential of advertising in rising salesare directly related to funds available. Disadvantages It can lead to over or under spending It

It can lead to over or under spendingdecline sales or potential of advertising in rising sales It is di cult to predict sales

It is di cult to predict sales for new products cult to predict sales for new products

Decrease in sales leads to decrease in advertising budget which may be neededspending It is di cult to predict sales for new products (iv) Competitive parity method –

(iv) Competitive parity method –

Budget is based on competitors expenditure, advertisers decide budget matching competition’s % of sales allocationwhich may be needed (iv) Competitive parity method – Information of competitor`s budget is available in

Information of competitor`s budget is available in trade journal and business magazinedecide budget matching competition’s % of sales allocation The basis is that collective wisdom of many

The basis is that collective wisdom of many rms may generate an advertising budget optimum or close to optimum rms may generate an advertising budget optimum or close to optimum

It leads to competitive stabilitygenerate an advertising budget optimum or close to optimum It minimizes chances of promotional wars Disadvantages

It minimizes chances of promotional warsor close to optimum It leads to competitive stability Disadvantages Each rm allocates budget according to

Disadvantages

Each rm allocates budget according to its own speci c goals rm allocates budget according to its own speci c goals

It ignores the contribution of media and creative executionsrm allocates budget according to its own speci c goals Information is gathered when money is

Information is gathered when money is spentIt ignores the contribution of media and creative executions (v) Objective and Task method In this

(v) Objective and Task method

In this method the selling objectives and budget decision are linked and considered simultaneously. It involves –

De ning the advertising communication objectives to be accomplished ning the advertising communication objectives to be accomplished

Deciding speci c strategies and tasks necessary to achieve them c strategies and tasks necessary to achieve them

Estimating the costs involved in putting these activities in operationThe total of these costs is taken as the base to determine the advertising budget.

The total of these costs is taken as the base to determine the advertising budget.the costs involved in putting these activities in operation Advantages The method develops budget from ground

Advantages

The method develops budget from ground up which is a proper managerial approachas the base to determine the advertising budget. Advantages does not rely on past sales or

does not rely on past sales or future sale forecastsbudget from ground up which is a proper managerial approach considers all factors under advertiser’s control

considers all factors under advertiser’s controldoes not rely on past sales or future sale forecasts It It Disadvantages is di cult

It

It

Disadvantages

is di cult to implement cult to implement

requires managerial involvement and high skillscontrol It It Disadvantages is di cult to implement attempts to introduce variables such as awareness,

attempts to introduce variables such as awareness, knowledge, attitudeto implement requires managerial involvement and high skills It It It formation etc. It is di

It

It

It

formation etc.

It is di cult to estimate all costs and determine all tasks necessary to achieve the set objectives cult to estimate all costs and determine all tasks necessary to achieve the set objectives

(vi) Pay out planning

It is useful when introducing a new product

It

is useful when introducing a new product

The aim is to spend heavily to achieve increased awareness and product acceptance

The aim is to spend heavily to achieve increased awareness and product acceptance

It estimates the investment value of advertising by linking it to other budgeting methods

It estimates the investment value of advertising by linking it to other budgeting methods

The idea is to predict the amount of revenue the product will generate and the

The idea is to predict the amount of revenue the product will generate and the costs it will incur over a period of time

The advertising budget is determined on the basis of rate of return desired

The advertising budget is determined on the basis of rate of return desired

Preparing a payout plan depends upon accuracy of sales forecast, factors a ecting market ,
Initially the advertising expenditures will be high and eventually will reach

Initially the advertising expenditures will be high and eventually will reach

a break-even point and then will show decline and increase in sales following the S shaped Function

Advantages

Advantages It is useful and logical planning tool Disadvantages It cannot account for uncontrolled factors e.g.

It is useful and logical planning tool

Disadvantages

It is useful and logical planning tool Disadvantages It cannot account for uncontrolled factors e.g. –

It cannot account for uncontrolled factors e.g. – competition, changes in

government policies, new technology

(vii) Quantitative Models

Advertisers use quantitative methods such as mathematical and statistical models to allocate advertising budget

Advertisers use quantitative methods such as mathematical and statistical models to allocate advertising budget

Multiple regression analysis is used to determine the e ect of advertising expenditure on sales.

Multiple regression analysis is used to determine the e ect of advertising expenditure on sales.

Experimentation and formal analysis is required to use this method

Experimentation and formal analysis is required to use this method

It is an expensive and time consuming method

It

is an expensive and time consuming method

(viii) The Experimental approach –

It is an alternative to quantitative models

It

is an alternative to quantitative models

The Advertising manager conducts tests or experiments in one or more selected market areas

The Advertising manager conducts tests or experiments in one or more selected market areas

The Advertising strategy is tested in market areas with similar population, brand usage, market share

The Advertising strategy is tested in market areas with similar population, brand usage, market share

Di erent advertising expenditure levels are kept for each market

Di

erent advertising expenditure levels are kept for each market

Brand awareness and sales levels are measured before and after

Brand awareness and sales levels are measured before and after

Results are compared and variation of in uence of advertising expenditure studied

Results are compared and variation of in uence of advertising expenditure studied

The feedback results determine the advertising budget levels

The feedback results determine the advertising budget levels

Manager may decide a certain budget level according to the advertising objectives

Manager may decide a certain budget level according to the advertising objectives

Disadvantages