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Stage 8 Stop
Stage 9 Evaluate
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Today two
big questions...
...
What should I spend it on?
1. Proctor & Gamble 2. Verizon 3. AT&T 4. General Motors 5. Pfizer 6. Johnson & Johnson 7. Walt Disney 8. Time Warner 9. LOreal 10.Kraft
4.19 3.02 2.79 2.22 2.10 2.07 2.00 1.85 1.83 1.75
Advertising is an investment!
Most methods attempt to justify a level of spend advertising is a form of taxation More recent commentators see advertising as an investment just like new plant or personnel
US Ad Ratios 2010 Transportation Services Perfume, Cosmetic, Toilet Prep Motion Pic, Videotape Prodtn Mailing, Repro, Comml Art Svcs Distilled And Blended Liquor
12.5 11.5
11.2 10.1 9.8 9.8 9.2
26.3 23.1
41.6 20 16.3 19.5 17.4
Source: Advertising Ratios & Budgets, 34th Edition, Schonfeld & Associates, Inc.,
A Little History
Residue of last years profits focuses on source of funds, not their use.
much the same result as percentage of forecast sales. regards advertising as a fixed cost.
Marginal return
mostly used to assess direct response. mostly used by business to business advertisers.
Modelling the most sophisticated approach and seen as a necessary part of the Object and Task method.
Objective and Task defines objectives, and works out cost of how to reach them but requires modelling to understand how goals can be reached.
Zero based each part of the budget must be justified from zero. It is a more stringent version of Objective and Task.
Broadbent's 3 Steps
Review information
Obtain suggestions Evaluate and consider
Brand budgets: The advertising budget is part of a greater marketing budget, revenue fixed costs = contribution + adspend + promotion.
Advertising effects.
2. Obtain suggestions
Other systems
Broadbent's Formula
In:a = ln {E(R-V)A^E}/(1-E)
Where: a = new adspend E = elasticity of advertising R = revenue V = variable costs A = old adspend
What is Elastcity? The amount one thing changes as a result of another changing Here The amount sales change as a result of advertising High Elasticity Increasing or decreasing advertising spend changes sales levels Low Elasticity Sales levels are constant in spite of changes in advertising spend
And so... The larger the margin in proportion to the adspend the better the case for more adspend. On this basis, optimal spends on brands within a portfolio, products within a brand or countries across a single brand should be proportional to the result of the following for each brand or country.
Margin/Spend x Elasticity
Put more simply, money should be put behind those brands that will give a good return on investment, bearing in mind the possible cannibalisation effects of increasing adspend.
The Exceptions...
There are three exceptions to this, which should be treated as special cases, requiring disproportionately large investment: 1. Launches or line extensions where spend cannot be based on history. 2. Brands that are judged to have an as yet unexploited potential. If each brand is funded solely according to its profit contribution, brands with high potential but modest current sales could be starved of the resources necessary for long term growth. 3. A flagship brand that will have a large positive effect on others in the portfolio. Think iPod and Razr.
Problem is... ... you need to balance time and resources against output ...you need a system which works in the real world
Basic SOV:SOM John Philip Jones undertook the first serious study of the relationship between Share of Voice (SOV) and Share of Market (SOM) in 1989. Based on data on 1096 international brands, collected by Jones in 1989 and elaborated upon in Broadbent, On average, Jones data show larger market shares associated with larger shares of voice. In most sectors, an equilibrium SOV is observed. At this level of spend, share of market does not change.
Any deviation from the Equilibrium SOV, i.e. any excess of SOV, will change market share. Equilibrium SOV The deviation from the Equilibrium, i.e. Excess SOV, = Actual SOV Actual SOM So If Excess SOV > 0 (i.e. Actual SOV > Actual SOM) then market share will increase If Excess SOV < 0 (i.e. Actual SOV < Actual SOM) then market share will decrease
SOV
Basic SOV-SOM
Jones findings suggest that, on average, larger brands can get away with spending relatively less on advertising, while smaller brands and new brands, trying to get a foothold in the market, have to invest more than average on advertising. Recent analysis confirms this to be true of growth as well: smaller brands have to disproportionately increase their share of spend ahead of share of market in order to grow, while larger brands, conversely, have to make relatively smaller increases in share of voice to derive those same market share increases.
20.0%
15.0%
SOM
10.0%
5.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
SOV
Basic SOV-SOM
Additions to the rule of thumb: Launch brands will need a larger SOV than SOM Large brands will probably have a smaller SOV than SOM A number of individual differences exist for different product categories, and external factors such as the use of promotions, introduction of new brands and heavy retail brand activities influence this basic relationship in the individual markets.
SOV-SOM Stage 1
First, a scatter plot of share of market v share of voice in a given category in a given market is created. Then, the Equilibrium Line, the best fit curve through the data is estimated. This will identify threshold and diminishing return levels.
20 18 16 14 SOM 12 10 8 6 4 2 0 0 1 2 3 4 5 6 7 8 SOV 9 10 11 12 13 14 15
Diminishing returns
Threshold
SOV-SOM: Stage 2
Excess share of voice is calculated for each point and plotted against Change in Market Share
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18 16 14 SOM 12 10 8 6 4 2 0 0 1 2 3 4 5 6 7 8 SOV 9 10 11 12 13 14 15
Diminishing returns
Threshold
SOV-SOM: Stage 3
The best fit line through the data is estimated. This line represents the responsiveness to media investment and can be used to estimate Excess Share of voice required (and therefore Share of Voice required) for achieving share growth.
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0% -4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
SOV-SOM: Stage 4
Repeat these steps for all segments in all markets. Then an understanding of share of voice requirement (and hence investment requirement) for achieving market share gains will be known.
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0% -4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Weighting SOV:SOM Methods of using Share of Voice and Share of Market focus on adapting a previous year's SOV based on
Sales objectives Competitive effects Halo effect contribution to the brand
Weighting SOV:SOM
An approach is to take and multiply the current years SOV by coefficients: 1. Strategic Coefficient: this is the Brand factor, showing the contribution of a line or sub-brand to a masterbrand. A high figure would indicate a large halo effect on the brand as a whole. This coefficient is usually set between 0.8-1.2. 2. Segment Aggressiveness Coefficient: this coefficient relates the brand to its competitive environment, giving a single figure to account for competitive media weight in the segment and the number of competitors. Again, this coefficient is set between 0.81.2.
Weighting SOV:SOM Further coefficients may be used to describe such things as cannibalization effects from specific lines and brands where a negative Strategic Coefficient would not be appropriate. This is then subjected to a reality check, assessing whether the budget is affordable and will achieve the desired result. Failing these tests requires a reassessment of the coefficients.
Using SOV/SOM The process for using a SOV/SOM approach is: Set market share objective Decide on appropriate coefficients/refinements to basic SOV/SOM calculation Examine graph of Excess Share of Voice against Change in Market Share to give increase in SOV needed Multiply total SOV required by cost per % SOV Result is budget required
Regional Testing
Regional testing can be used to set budgets by testing a potential change in marketing activity against a sales or other KPI - target It is particularly useful where there is a new factor or a lack of historical data, for example Media changes New products Price changes
Some Rules of Thumb 1. A test region should represent at least 10% of sales and should be analysed against a control region (either the rest of country, or a similar consumer landscape and size to the test region) a control period 2. Care must be taken to ensure that other factors havent changed between the regions or periods 3. If they have changed, an econometric estimation of the demand elasticity of the factor in question is needed to strip out its differential effect from both regions 4. A test can only explain the change in terms of one factor. To change more than one, multiple test regions and different levels of the multiple factors are needed. 5. For proper evaluation of a national test, a robust, high explanation econometric model of sales must be in place that can be updated post-test to measure and report the result
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6. For proper evaluation of a national test, a robust, high explanation econometric model of sales must be in place that can be updated post-test to measure and report the result 7. Test only activities/levels that are willing to be implemented 8. Test high enough: at least a 40% increase is recommended and a secondary test of a 40% decrease 9. A test of less than four weeks is likely to be unreadable. With weekly data, test for 4 to 8 weeks, with monthly data, test for two to three months 10. With advertising typically having a carryover effect of 40 to 80%, the whole effect wont be seen for at least 4 weeks after the test
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Econometric Modelling
Econometric modelling can provide a basis to some of the techniques described above but also provides a basis for budget setting in its own right The output of a model provides demand curve by marketing activity These can be combined with a likely marketing/media mix to provide an overall demand curve which can then be used to calculate a budget based on a target KPI The same process can also be used to calculate the optimal budget by calculating points of diminishing return for spend on different media
External coverage/PR/WOM
Availability/Distribution
Price Mix/Promotions
Key Metric
Economic/Market Trends
Competitors Advertising
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Econometrics separates out the impact of all significant factors builds a recipe from your kpi cake
kpi
Ingredients Product Advertising x medium Sponsorship Direct Mail Gifts Trial Leaflets/Catalogues PR Brand/Halo advertising Promotions Pricing Availability Product changes Competitor distribution Competitor pricing Competitor communications Market Trends Seasonality Economic change
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Press
DM
TV2
Base
WEEKS
And relate the sales uplift to the investment in each strand to determine ROI
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Objectively and fairly quantify what is important when it affects sales (short and long term) how much it affects sales factors outside of your control
Provide starting point For the strategic planning process For investment allocation
country/regional portfolio brand/product portfolio Media/communication portfolio
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Rules of thumb
An optimum budget is arrived at by: Considering the ad budget as part of the overall company budget. Being prepared for an iterative budget setting process. Using a defined method. Backing this up with knowledge from econometric modelling.