CHAPTER 5, Murphy & Cunningham, Advertising & Marketing Communication Management

Determining the Advertising Appropriation and Budgeting

"No company that markets products or services to the consumer can remain a leader in its field without a deep-seated commitment to advertising."

--Edwin L. Artzt CHAIRMAN AND CEO, PROCTER & GAMBLE

INTRODUCTION

Determining an advertising budget is an old challenge. But, as media choices have become more numerous and the "noise" in the marketplace has increased, the budgeting decision has grown increasingly difficult. This chapter explores some traditionally popular advertising budgeting techniques as well as the new challenges facing advertising managers when dealing with the allocation of budgets for advertising efforts. The relationship between advertising objectives and budget decisions is a vital one. It is important, therefore, to review some of the principles set forth in Chapter 4 to better understand the rationale behind advertising budget allocation models. This chapter will consider long-term and short-term advertising objectives as major criteria for budget decisions. The effectiveness of advertising expenditures will also be examined, as budgeting should be considered a control tool as well as a planning ingredient.

 TRADITIONAL METHODS OF SETTING BUDGETS

The advertising budgeting decision can be divided into two major components: (1) how much should be spent on advertising and promotion, and (2) how the total advertising and promotion money marked for different media, different products/services, geographic areas or target markets should be spent.

Determining the size of the advertising budget is a very important decisioninfluencing the future impact of all of the firm's marketing efforts and determining the firm's future marketing strategy. The promotion budget is generally a major financial expenditure and will be closely scrutinized by top management. It is crucial therefore that such a decision be made with a careful and thorough consideration of potential effects, along with its constraints and limitations.

Some methods have been popular among advertising managers for many years. While all such methods have some shortcomings, they have they have allowed managers to plan and control the performance of the advertising and promotion functions by comparing against results within their industry or against the performance of major competitors. Such methods will be discussed next.

The Percentage-of-Sales Method

There are two ways of establishing an advertising budget according to the percent-of-sales method. The first is to calculate advertising allocations as a fixed percent of past sales. This calculation is done by applying a specific percentage number to the previous year's total sales revenue for a product, a line of products or a whole company. The formula for this calculation is

A2 =f(S1)

where

A2 is the total advertising budget for next year (or period 2)

f is percentage figure

S1 is sales for period 1 (or last year's sales)

 Advertising-to-sales ratios are computed by each industry every year by professional advertising organizations. An example of such calculations can be seen in Table 5-1.

The reason for this practice is to provide a general overview of whether expenditures change over time by industry in response to conditions. Year-to-year comparisons are also reported to provide another measure of relative growth for specific industries.

The first budgeting model of advertising-to-sales ratio has some shortcomings. First, the use of past sales to determine future advertising allocations does not seem logical. Advertising is assumed to influence a firm's sales performance, yet the use of past sales to determine future advertising allocations will not take that interdependence into consideration. In addition, such a method the advertising manager to adjust the budget to meet in the marketplace because the only criterion used is the past performance of the firm.

The second advertising-to-sales method attempts to eliminate these drawbacks. Instead of basing advertising expenditures on past sales, a forecast future sales is made, and the advertising budget is calculated of that amount. The formula for this model is

A2 = f(S2)

where

A2 is the total advertising budget for next year (or period 2)

f is a fixed percentage

S2 is the total sales forecasted for next year (or period 2)

This second model is an improvement over the previous one because it based its budget calculation on the sales period that will theoretically be affected by the advertising expenditures to be budgeted. However, the model still reflects only one of the possible effects of advertising--its relationship to sales. It ignores all other possible variables that may be influenced by advertising, mainly some of its long-term effects.

The advertising-to-sales ratio is as good a method of budgeting advertising expenditures as a firm makes it. If used to develop a base allocation, which can be modified as the market or firm objectives change, then it is a very good yardstick for budget considerations.

The Competitive-Parity Method

Another popular method for setting advertising budgets is the competitive-parity method. This method establishes an advertising budget as a proportion or share of the product or service's market share. The expenditure on advertising for the product is expressed as a share of the total advertising for all products in that category. As an example, if the total advertising expenditure for athletic shoes is $100 million, and the expenditure for Nike is $30 million, Nike would have a 30 percent share of advertising, or 30 percent share of voice.

The formula for the calculation of the "share of voice" for a specific product/service is as follows:

AF

Asv = Ac + AF

where

Asv is the firm's share of voice

AF is the firm's advertising expenditures for the period in question

Ac is all competitors' advertising expenditures for the period in question

The reason for using share of voice as a method for setting advertising budgets is the belief that, in a stable market, a firm's share of voice should be the same its share of market. If a firm were attempting to gain competition, its share of voice should be greater than its would commonly be the case for new products entering place.

The competitive-parity method also focuses on only one of the many variables affecting advertising. The fact that competitors' actions should be one considered when establishing advertising expenditures is undeniable. However, this method ignores other important factors that may affect the advertising allocation. Changes in consumer habits, economic conditions, and the strategic objectives of a firm are some of the forces that should taken into account.

This method does have some advantages. It provides a yardstick for comparing results whenever a product faces a very stable market and enjoys a mature competitive position. As such, it is a useful planning and control tool.

An example of the use of competitive-parity spending can be seen in the recent move of some automobile companies. In an article appearing in October 28, 1992, Ford Motor Company and the Chrysler Corporation stated that they planned to increase their advertising spending to reclaim market shares lost to Japanese competitors. Japanese auto advertised very heavily in 1991, and domestic manufacturers believed that in order to recapture their market share they would have to fight back with an increased budget. The advertising expenditures of General Motors, for example, appeared to be very different for the first six months of 1991. General Motors had spent 6 percent less than the previous year, while Toyota spent 11 percent more. Sources from the companies felt Toyota's increased advertising expenditure was responsible for the relative market share of the two companies. In this specific example, competitive-parity method appears to have been the main motivation behind the domestic manufacturers' reaction to competitive spending.

The competitive-parity method also takes into consideration the long-term effects of advertising. To establish a stable market share, the competitive-parity method suggests that a firm should maintain a share of voice over a certain period of time. Many leaders in industry believe likewise. Edwin Artzt, of Procter & Gamble, stated that "advertising is a longer-term investment, and it shouldn't be intruded upon by short-term needs." This statement supports continued expenditures in advertising in spite changes in profits and sales. The expenditures should continue to reflect a position as opposed to a concentration on immediate results.

 The Objective-and-Task Method

The objective-and-task method of setting advertising budgets is used by the majority of advertisers in the United States. According to this method, a firm will first set objectives for its advertising task. These objectives may include reaching a certain percentage of the population or of prospective consumers, creating awareness of the product among a percentage of the specific market or geographical area, and so on. After these objectives have been set, the firm calculates which media to purchase and at what cost. That cost may be arrived at by deciding what percentage of the total reached by the advertisement and how many times each individual in the population should be exposed to the advertising message. The cost of obtaining this advertising reach and frequency will then be translated into an advertising budget.

This approach is more logical than the previous two approaches because it relates specific tasks of advertising to the amount of money being spent to accomplish those tasks. It also relates the theory of advertising effect to the budget decision. For example, if the main goal of advertising is to develop awareness among the public, then fewer exposures per person will be needed than if the objective is to achieve customer preference for the product.

The major problem with this approach is that it doesn't fully consider the relationship between short-term and long-term effects of advertising or translate them immediately into a budgeting decision. In addition, although a certain number of exposures may produce a specific effect on the audience, the relationship is not always constant or measurable. Nevertheless, the method is an improvement over the percentage-of-sales and competitive-parity methods. This method has been refined using different problematical models. Large advertising firms have developed models that they use to formulate budgets in specific product and service categories. This practice illustrates the belief that the memorability and efficiency of advertising will differ by product categories or by geographic or demographic factors.

An example of the application of the objective-and-task method is a decision by Anheuser-Busch to advertise its products to female consumers. At the end of 1991, Anheuser-Busch kicked off a sharply different campaign, to women. Its purpose was to try to cut through the typical advertising and to treat women as equals. The previous approach used by Anheuser-Busch was the "Nothing beats a Bud" campaign--a two-year-old campaign that the manufacturer believed was no longer timely and was perceived as arrogant by women.

The chairman of Anheuser-Busch stated when unveiling the campaign that the company wanted to portray both men and women as healthy and vital individuals. It did not want to be perceived as using women as sex objects.

(Vincent Blasko, "Budgeting Practices of Big Advertisers," Journal of Advertising Research (December 1981): 23-29.)

The budget for this campaign was considerably higher than for the previous campaign because the advertiser was focusing on a specific target market and particular results from the advertising.

Although there are many other ways to establish an advertising budget, the three methods discussed in this portion of the chapter are the ones most by advertising firms and agencies. Another method frequently mentioned is the "all-you-can-afford" method, meaning a firm will decide to spend as much money as it can on advertising without regard to specific objectives, to competitive parity, or even to the level of sales. In addition, economic models are used to try to achieve a level of expenditure that will bring positive marginal gain to the company. Examples of such methods abound in specific studies made for classes or even brands of products over the years. As marketing factors change drastically and as the number of variables affecting marketing decisions increases, economic models to develop advertising budgets and to assess advertising effectiveness are becoming increasingly complicated. Nevertheless, in the future it is expected that more and advertising agencies alike will resort to such models because expenditures are increasing and the accountability of advertising is becoming of an issue, at least among U.S. advertisers. The next section will consider recent changes in advertising budgeting methods.

 TRENDS IN ADVERTISING DECISIONS

The late 1980s and the early 1990s witnessed a major change in consumer advertising in the United States. Following a period of economic growth caused by massive defense spending by the federal government, U.S. producers found themselves trying to reach a market faced with slowed income growth and higher unemployment. The American recession and the increase in foreign and domestic competition produced a market situation that advertisers had not faced before. One of its immediate effects was an increase in the number of appeals that proposed immediate results for the consumer. Coupons, price-cuttings, discounts, and special promotions became more common in the marketplace, with varying market reactions. One such reaction was the perception that brand advertising no longer worked. Brands are insubstantial things that signal differences between products. Good brands are supported by large amounts of advertising expenditures. Despite the evidence of the value of brands, in the early 1990s, creating and sustaining brands became increasingly difficult. Manufacturers were under pressure to make big short-run gains in sales, and a lot of brand managers gave up long-term expenditures on behalf of short-term promotional tools such as sweepstakes, price-cutting, and price promotions.

 One of the focuses of advertising budgeting has to be deciding just how important specific brands are for a given firm or market. Advertisers should weigh the relative importance of price, the product itself, or the brand name before deciding how to allocate advertising expenditures. As consumers become more discriminating and as they perceive products to be more similar, the importance of brand advertising may decrease.

Firms have tried to attack the problem of the declining importance of brands in different ways. Manufacturers have tried to steer consumers' from promotion by developing a stronger image for some of their products rather than developing an image for a product class. Campbell's Soup, for example, has emphasized in its advertising soups with less salt or soups developed for consumption by children.