Advertising Budget - Competitive Parity Method: (A&BM 30Sept2020)

Advertising Budget

(4) Competitive Parity Method:

Competition is one of the powerful factors affecting marketing performance. This method considers the competitors’ advertising activities and costs for setting advertising budget. The advertising budget is fixed on the basis of advertising strategy adopted by the competitors.

Thus, competitive factor is given more importance in deciding advertising budget. For example, if the close competitors spend 3% of net sales, the company will spend, more or less, the same per cent for advertising. Here it is assumed that “competitors or leaders are always right.” If not followed carefully, this method may result into misleading.

It is obvious that a company differs significantly from the competitors in terms of product characteristics, objectives, sales, financial conditions, management philosophy, other promotional means and expenses, image and reputation, price, etc.

Therefore, it is not advisable to follow the competitors blindly. Marketing/advertising manager should take competitors’ advertising strategy as the base, but should not follow as it is. The advertising budget must be adjusted to the company’s internal and external situation.

This method involves setting budgets to match competitors’ outlays and funds. In this method, the company monitors competitors’ advertising and follows it. This method is generally used in markets in which advertising is heavier and it is felt absolutely important to the companies not to be left behind the competitors.

Normally, it is felt that the brand leader needs to spend proportionately less as a share of total advertising to maintain its market share, while conversely a brand trying to improve its market share will have to spend proportionately more. But such a type of budgeting plan fails to reflect the firms’ own advertising needs or marketing requirements.

None of the marketing managers in practice ever will accept the fact that they set their advertising and promotions budgets on the basis of what their competitors allocate. But a close examination of their advertising expenditures, both as a percentage of sales and in respect to the media where they are allocated, will show little variation in the percentage-of-sales figures for firms within a given industry.

The rationale for setting the budget this way is that the collective wisdom of the industry is involved. Some are of the opinion that since it takes the competition into consideration, marketplace is more stable and marketing warfare is minimized in turn minimizing the unusual or unrealistic ad expenditures.

 

Limitations:

1. In case of a new product, the method fails to guide for deciding on advertising budget.

2. It is difficult to know in which stage of life cycle the product of close competitor is passing through.

3. Company differs in terms of sales, profits, challenges, financial conditions, and so on. To follow competitors directly may be erroneous.

4. Advertising is not the sole factors that affect the sales; interplay of many factors determines sales.

5. In case, when there are many competitors, it is difficult to decide as to whom the company should follow.

6. The method is followed only when there are dominant competitors. In absence of competition, the method cannot be used.

7. The method can make a sense only to followers and challengers. It is not applicable to a market leader.

8. It ignores the fact that advertising and promotions are designed to accomplish specific objectives and not merely to face competition.

9. It assumes that the ad campaigns will be equally effective because firms have done similar expenditures. This highly ignores the contributions of creative executions and/or media allocations.

10. It ignores a very natural possibility that some companies simply make better products than others.

11. There is no guarantee that competitors will not increase or decrease its own expenditures, regardless of what other companies do because competition cannot be fully assessed at the beginning of a financial year.

12. Finally there is no reason why competitive parity should avoid promotional wars. We are a witness to the Coke versus Pepsi wars.

Nevertheless, companies employ the competitive parity method. But a wiser decision is not to ignore the competition but use this method in conjunction with the percentage-of-sales or other methods. Marketing never suggests to always keep parity with competitors however it suggests a very meticulous vigilant on them.

 

Advantages of Competitive Parity

One of the key advantages of using this method to calculate the advertising and branding expenditure is that a business will not be too far away from competitors. The spending will match that of the competitors and the visibility of the brand and its exposure to potential customers will match that of the competitors. This means that the brand is not overspending much.

Many companies use sales forecasts and demand forecasts to predict what their spend on branding and advertising activities should be for future periods, but this method is relatively simple and does away with complicated forecasting methods. Due to this drastic changes in the advertising expenses, if made by competitors, can be easily replicated because it is easy to calculate the necessary expenditure.

The above stated advantages needn’t always be advantageous for the company. As stand alone points they are definitely advantageous but can vary from situation to situation. For a company that is not doing so well financially, this kind of advertising and branding budgeting may not bode well.

Disadvantages of Competitive Parity

For new players in the market, following this kind of a model might prove disastrous. They will have to bear huge opportunity costs to be able to match up to the advertising and branding budgets of existing big players in the market. This might prove detrimental to their financial health and lead them into huge losses. For new entrants, this kind of budgeting is not always advised unless the market in itself is very new and still in its nascent stages in which case it makes sense as all the competitors are relatively new too.

Another trap that businesses usually fall into is spending exorbitant amounts of money on products that are different in nature and not totally competitive. Two companies might have products that are competitors but they may also have products that are not competitive. But the competition gets so intense that companies forget this and keep raising their spending on branding and advertising even when it is not required.

If you follow the advertising of certain competitors closely, you will observe them competing with each other, therefore matching their spending on advertising and branding. Take the example of Flipkart, Amazon and Snapdeal.

Advertising Budget - Objectives and Task Method (A&BM 30Sept2020)

Advertising Budget

 

(3) Objectives and Task Method:

This is the most appropriate ad budget method for any company. It is a scientific method to set advertising budget. The method considers company’s own environment and requirement. Objectives and task method guide the manager to develop his promotional budget by:

(1) defining specific objectives,

(2) determining the task that must be performed to achieve them, and

(3) estimating the costs of performing the task. The sum of these costs is the proposed amount for advertising budget.

 

The method is based on the relationship between the objectives and the task to achieve these objectives. The costs of various advertising activities to be performed to achieve marketing objectives constitute advertising budget.

A more effective budgeting strategy would be the one which considers the firm’s overall promotional objectives. The budgeting then is done according to the requirements for meeting these goals.

The idea is to budget so the promotional mix strategies can be implemented to achieve the stated objectives. The most well-known method under this approach is Objective and Task Approach.

 

The approach used by the objective and task method is build up approach consisting of three steps:

1. Defining the communications objectives that are to be accomplished,

2. Determining the specific strategies and tasks needed to attain them

3. Estimating the costs associated with performance of these strategies and tasks. The total budget is based on the accumulation of these costs.

 

Under this method, following steps are to be followed to set advertising budget:

1. Determine main objectives of marketing department.

2. Set advertising objectives in terms of sales, profits, brand loyalty, competitive stability, etc.

3. Determine advertising task in terms of various advertising activities required to be performed to achieve the advertising objectives.

4. Estimate cost of each advertising activity for the defined period.

5. Make sum of costs of all the activities. It is the estimated amount for advertising.

 

This process involves several steps:

1. Finalize Communication objectives.

Any company generally has two kinds of objectives viz. the marketing objectives for the product and the communications objectives. The first job is to establish the marketing objective and when that is done the net task is to determine what specific communications objectives will be designed to accomplish these goals. Communications objectives must be specific, attainable, and measurable, as well as time limited.

2. Determine tasks required:

The strategic plan designed to attain the objectives consists of various elements one of which could be advertising in various media, sales promotions, and/or other elements of the promotional mix. Each has its own role to perform and hence the specific tasks should be finalized.

3. Estimate aggregate expenditures:

The next stage is to determine the estimated costs associated with the tasks fixed the last step.

4. Monitor:

A regular monitoring is required as to how much the objectives have been attained effectively. If advertisements are an investment then a close monitoring of the invested amount and its return is must.

5. Reevaluate objectives:

Once specific objectives have been attained the budget should be reevaluated to check how better it can be used to attain the other goals. Thus, if one has achieved the level of consumer awareness sought, the budget should be altered to stress a higher-order objective such as evaluation or trial.

The major advantage of the objective and task method is that the budget is developed from the bottom to up, which is a proper and rational managerial approach. The method does not rely on past sales figures, forecasted sales, what the competition spends and considers only those factors, which are under the advertiser’s control.

According to John J Burnett, this budget setting method is particularly well suited to new product introduction when advertising must be developed more or less from scratch. Although it is difficult to implement this method, it is still fairly popular among large companies.

The major difficulty that confronts planners is to determine which are those specific tasks required and the costs associated with each. For instance, if the objective is to accomplish an awareness level of 60% among the target audience, what specifically are those tasks that need to be performed to achieve this level of awareness? How much will it cost to perform these tasks? It is difficult to know precisely what is required. Past experience, though, serves as a good guide in case of existing products.

Moreover it is not always possible to know exactly what are the specific tasks required for achieving the set objectives and how much it will cost to complete the job. This process is easier in case of an existing product or a similar product in the same product category. But it is especially difficult for new product introductions. Hence because of these disadvantages, many marketing managers use top- down approaches for setting the total expenditure amount.

6. Payout Planning:

The budgeting for a new product is a very different story because the first months of a new product’s introduction require heavier-than-normal advertising and promotion appropriations to stimulate higher levels of awareness and subsequent trial. James O. Peckham studied the Nielson figures of more than 40 years and estimated that a new entry should be spending at approximately twice the desired market share. But the major question is what will be the profitable amount of spending on promotion of the new product.

In order to determine this, marketers often develop a payout plan that determines the investment value of the advertising and promotion appropriation. The basic idea is to project the revenues the product will generate, as well as the costs it will incur, over two to three 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 the return might be expected.

Managers are always curious to find out how much money is to be invested in advertising and for how long, before the brand gets established. How accurately a payout plan can be developed depends on the accuracy of sales forecasts over time, factors that affect the market and estimated casts.

Advertising expenditures during the year of brand introduction will be high so as to stimulate the movement of the target audience through various stages finally leading to purchase. At this stage growth in sales can be expected to be slow and the company would lose money.

The brand reaches break-even in the next few coming years (may be 2^nd or third year) and then starts showing substantial profits. It cannot account for all the uncontrollable factors such as competition, new technologies, changes in government policies and other factors that may influence the plan. Payout planning method is not popular among companies

The payout plan is not always perfect however it guides the manager in establishing the budget. A combination and joint use of this method and the objective and task method, is a much more logical approach to budget setting than the top-down approaches previously discussed.

On the contrary several studies have shown that it does not have a wide acceptance in the industry. Moreover, it cannot account for all the uncontrollable factors such as competition, new technologies, changes in government policies and other factors that may influence the plan.

 

Thus, advertising budget is set on the basis of the objectives a company wants to achieve and in what way it wants the objectives to be achieved. This method is logically consistent and practically applicable for all the companies. The method emphasizes on actual needs of the company. It is considered as a scientific method to set ad budget.

Advertising Budget - Percentage of Sales Method

Advertising Budget

(2) Percentage of Sales Method:

It is a commonly used method to set advertising budget. In this method, the amount for advertising is decided on the basis of sales. Advertising budget is specific per cent of sales. The sales may be current, or anticipated. Sometimes, the past sales are also used as the base for deciding on ad budget. For example, the last year sales were Rs. 3 crore and the company spent Rs. 3 Lakhs for advertising. It is clear that the company has spent 1% of sales in the last year.

Company has the tendency to maintain certain per cent (or percentage) of sales as ad budget. Based upon the past, the current and the expected sales, amount for advertising budget is determined. This method is based on the notion that sales follow advertising efforts and expenditure. It is assumed that there is positive correlation between sales and advertising expenditure. This is not the scientific method to decide on advertising budget.

This is the most commonly used method for budget setting. Large firms generally go by this method. According to this method, advertising and promotions budget is based on sales of the product. Management determines the amount by either.

 

i. By taking a percentage of the sales revenue

ii. Assigning a fixed amount of the unit product cost to promotion and multiplying this amount by the number of units sold.

 

Some companies instead of considering the past sales consider the percentage-of-projected future sales as a base. This method also uses either a straight percentage of projected sales or a unit cost projection. In the straight-percentage method, the marketing manager estimates projected sales for the coming year. The budget is a percentage of these sales, often an industry standard percentage.

In its simplest application, a fixed percentage of last year’s sales figure is allocated as the budget. For example, suppose the total sales of a company ABC Pvt. Ltd. in 2005-2006 were Rs 20 Lakhs. Now according to this method, the simplest calculation for advertisement budget is say 10% of the last year’s sales. So, the advertisement budget for the year 2006-2007 is 10% of Rs 20 Lakhs i.e. Rs 2 Lakhs.

In case the ad budget is to be decided on the basis of sales units, let us assume that the manufacturing cost per unit of table fan for ABC Pvt. Ltd. is Rs 500 and the advertising money allocated per unit is Rs 30. The projected sales figure is 1,00,000 fans for the coming year 2007-2008, then the total advertising budget can be calculated as Rs 1,00,000 x 30 = Rs. 30,00,000).

The percentage figure selected is definitely not a standard percentage across any industry. This figure varies from one industry to the other and also among different firms in the same industry. It depends on the company policy. Actual money spent varies considerably depending on the individual company’s total sales figure.

As shown in the example the budget for a current year depends on the sales of the last year. Now if a company keeps the percentage fixed and then sales this year decreases then advertisement budget for next year is also less. But marketing says that if the sales are less in a year one way out of many to increase it in the next year could be an increase in the advertisement and promotional budget.

Thus, one advantage of using future sales as a base is that the budget is not based on last year’s sales. As the market changes, management should consider the effect of these changes on sales into next year’s forecast rather than relying on past data.

 

Merits:

1. It is based on sales volume. Therefore, cost of advertising can be offset against profits earned from the sales. It satisfies financial management.

2. This method encourages marketing manager to think in terms of relationship between promotional costs, selling price, and profits per unit.

3. It maintains competitive parity. All firms in the industry spend approximately the same percentage of sales for advertising.

4. It keeps the company in constant touch with the sales target to be achieved.

5. It is somewhat financially safe and helps a company keep advertisement spending within limits irrespective of the fact whether the base is past year’s sales or what the firm expects to sell in the upcoming year.

6. This method is simple, straightforward, and easy to implement.

7. Regardless of which basis-past or future sales-is employed, the calculations used to arrive at a budget are not difficult.

8. This budgeting approach is generally stable when competing firms spend approximately the same percentage of their sales on promotion

9. Promotion expenditures vary with what company is aiming for in terms of sales

10. It encourages management to think of the relationship among promotion cost, selling price and profit per unit.

11. This method is suitable for the companies whose ad budget is small relative to sales

 

Demerits:

The method has been criticized on following grounds:

(a) In absence of specific guidelines, it is not possible to decide the appropriate per cent of sales. It lacks a scientific base.

(b) Long-term planning is not possible because a long-term sales forecasting seems difficult.

(c) It neglects other objectives of advertising. Only sales are given priority. It doesn’t consider the need of advertising.

(d) Stage of product life cycle is not considered. New Product or Innovative Product

(e) It is, to some extent, inflexible.

(f) It is assumed that only advertising affect sales. It is erroneous.

The basic premise on which the budget is established is sales. As just discussed, if the level of sales determines the amount of advertising and promotions to be spent then the cause-and-effect relationship between advertising and sales is reversed. It treats advertising as an expense associated with making a sale rather than an investment. Companies that consider promotional expenditures an investment and reap the rewards.

In explaining the advantages, it was just mentioned that since it is a percentage of sales, either past or future expected, the method is stable. Now this can happen when all firms in the industry uses a similar percentage, but then what happens if one firm varies from this standard percentage? The problem is that this method does not allow for changes in strategy either internally or from competitors. But this is a highly impractical proposition because there are many kinds of market structures and in any time the leader can choose to divert from the standard.

The percentage-of-sales method of budgeting may result in severe misappropriation of funds i.e. over budgeting or under budgeting. When sales decrease, we may need more budget in advertisement as decrease in budget might lead to further decrease in incremental sales.

The percentage-of-sales method is also difficult to employ for new product introductions because in this case there is no sales history available. Also, projections of future sales may be difficult, if the product is highly innovative and absolutely new in the market.

Marlboro:

Marlboro cigarettes were introduced in the 1920s. The brand share was only one per cent in the early 1950s. The company invested heavily in building brand image in 1954 (cowboy country) and now the brand share among young smokers is in excess of 60% in the USA.

Glaxo:

When Glaxo introduced Zantac (Zinetac in India), the medication for gastric ulcer, it was forecasted to gain no more than 10% share against the well-entrenched Tagamet. Glaxo’s investment-driven campaign helped Zantac achieve more than 50% share and became the leading brand.

Advertising Budget - Affordable or Fund Available Method (A&BM 26Sept2020)

Advertising Budget

 

Methods for Setting Advertising Budget

The budgets are essentially predetermined at the top level who generally fails to get a clear-cut field level picture and hence the models under this approach have no true theoretical basis.

Several methods are used for setting advertising budget. Depending upon internal situations of the company, the suitable method is followed. Every method has its merits, demerits, and applicability.

 

(1) Affordable or Fund Available Method:

This is, in real sense, not a method to set advertising budget. The method is based on the company’s capacity to spend. It is based on the notion that a company should spend on advertising as per its capacity. Company with a sound financial position spends more on advertising and vice versa.

Under this method, budgetary allocation is made only after meeting all the expenses. Advertising budget is treated as the residual decision. If fund is available, the company spends; otherwise the company has to manage without advertising. Thus, a company’s capacity to afford is the main criterion.

This is a very simple method of budget allocation. After the budget has been allocated in all the areas i.e. all the other expenses have been taken care of the company then allocates the left-over money for the advertisements. This method is also called “All you can afford”. Those companies, which follow this method, consider advertisement as an expenditure and no expectations on returns are associated with this method.

These firms believe that advertising is tactical and not strategic and hence does not need much attention. Companies use this method, at the level of their affordability. Small businesses often use this method with the logic that the company cannot spend more on advertising than the amount it has left after the other expenses.

Another logic is that the products should be good in itself and then it will sell automatically without much of advertisements. This method is clearly an outcome of no sound decision making. The company could be overspending or under spending a well. The fact that some firms follow this method is a clear indication of their lack of knowledge and poor understanding of the role of advertisements.

 

Limitations:

Following are the limitations of the method:

(a) The method completely ignores the role or need of advertising in the competitive market environment.

(b) In long run, it leads to uncertain planning as there is no guarantee that the company will spend for advertising.

(c) Except company financial position, other factors like company’s need for advertising, consumer base, competition, and so forth are ignored.

(d) This method only guides that a company should not spend beyond its capacity.

(e) This is not a method in real sense.

(f) There is possibility of bias in deciding advertising amount.

What is Advertising Budget? (A&BM 25Sept2020)

What is Advertising Budget?

The budget is an expression of the expenditure plan. It is estimated to meet the financial requirements of advertising plans so that advertising objectives with planned strategies may be realized within a given time frame.

 

It is a statement of proposed advertising expenditure; a guideline for allocating the available funds to the various functions and activities of advertising.

The nature of the advertising budget, advertising appropria­tion, allocating advertising budget and retail advertising budget are the main decision areas of the advertising budget.

 

A budget is an expression in monetary terms of the forward plan and the proposed activity. Advertising plan includes sales targets, product facts, marketing information, competitive situation, creative platform, copy treatment etc. The advertising budget is the translation of an advertising plan into monetary form. It states the amount of proposed advertising expenses and informs the management of the organization the expected cost of executing the advertising plan.

 

Advertising Budget is the amount of money which can be or has to be spent on advertising of the product to promote it, reach the target consumers and make the sales chart go on the upper side and give reasonable profits to the company.

 

Before finalizing the advertising budget of an organization or a company, one has to take a look on the favorable and unfavorable market conditions which will have an impact on the advertising budget.

Benefits of the DAGMAR Process, DAGMAR is criticized on (A&BM 24Sept2020)

Benefits of the DAGMAR Process:

 

1. As the work of creating advertising is done by more specialists with narrow views beyond their own tasks, it becomes necessary for all involved to be able to see the common goal. The statement of objectives reduces wasted effort and keeps the advertising team on target by clearly showing what needs to be said.

 

2. People do better work when they have a clear toward what they are aiming. Specific goals allow all who are involved with the process to deal with the appropriate issues.

 

3. Being specific allows measurement, which allows a better allocation of budgeted resources. The budget is aided in the short run of the current campaign and is also helped in the long run. By measuring success and failure, the firm gains insight for appropriate budgets in future campaigns.

 

4. Goals are critical because advertising is intangible and the resulting process is amorphous. Because advertising is so subjective, any opportunity to introduce objectivity must be used.

 

5. Be concrete and measurable

 

6. Have a well-defined target audience or market.

 

7. Identify the benchmark and the degree of change.              

 

8. Specify a time frame to accomplish the objective.

 

 

 

The DAGMAR is criticized on the following points:

 

1. Some people believe that any of the marketing communication elements should be measured in terms of its sales effectiveness rather than some intermediate goal.

 

2. The objection focuses on many implementation difficulties inherent in the DAGMAR approach. In particular, the checklist falls short of providing sufficient details to implement the approach.

 

3. Substantial conceptual and measurement problem underlie the DAGMAR approach.

 

4. According to critics, the only relevant measure of advertising objectives is sales. But there are so many advertisements which are unable to increase sales but are able to achieve communication objectives. Advertising is seen as effective only if it induces consumers to make a purchase.

 

5. The attack is that DAGMAR is applicable only to large organizations. It lacks practicability for small organizations. Colley insistence on setting specific goals, writing them down and researching with benchmarks and specific measure criteria all suggest a very expensive and rigid managerial and research programme. The research that Colley suggested is quite expensive.

 

6. Restrictions on creativity

 

7. Short term accountability

 

8. Sales objective is main.

 

9. Practicality and cost.