Budgeting Flashcards
Accountants and IRS view advertising as a _____, while marketing managers view it as a _____
Current business expense; long term investment
Two reasons advertising is a long term investment
Investment in future sales
Builds consumer preference and promotes goodwill
Increases in market shares closely related to increases in
Marketing budget
What is the saturation limit
The point where more advertising spending will not increase units sold/profits, and may even turn people away
These exist below which advertising expenditures has no effect on sales
Minimum levels
Why not just spend until it stops working?
Advertising isn’t the only marketing activity that affects sales
Lack of a clear cut way to determine the relationship between advertising and sales/profits
6 budgets for advertising types
Fixed increment Percent of sales Share of market/share of voice Objective/task Quantitative modeling Empirical
Budget: designate approximately the same amount each year (adjusted for inflation or other market factors)
Fixed increment
Fixed increment budget
Designate approximately the same amount each year (adjusted for inflation or other market factors)
Fixed increment pros (2)
Easy to use
Simplifies long term planning
Fixed increment cons (4)
Assumes last year was OK
ignores competition
Not good for new products
Little to do with objectives
Percent of sales budget
Allocate percentage of last years sales, anticipated sales for next year, or combination
(Past advertising dollars)/(past sales) = % of sales
% of sales x next years sales forecast = new advertising budget
Allocate percentage of last years sales, anticipated sales for next year, or combination
(Past advertising dollars)/(past sales) x next year’s sales forecast = new advertising budget
Percent of sales budget
3 ways to determine % in percent of sales method
- Industry average
- Company experience
- Forecast of future sales
Using the industry average in percent of sales method assumes that
Every company in the industry has similar objectives and faces the same challenges
Using company experience in percent of sales method assumes that
The market is static
Using forecast of future sales in percent of sales method assumes that
A certain number of dollars is needed to sell a certain number of units
This method of determining % in percent of sales method assumes that every company in the industry has similar objectives and faces the same challenges
Industry average
This method of determining % in percent of sales method assumes that the market is static
Company experience
This method of determining % in percent of sales method assumes certain number of dollars is needed to sell a certain number of units
Forecast of future sales
Pros of percent of sales budget (2)
Easy to use
Simplifies long term planning
Cons of percent of sales budget (4)
Assumes static markets/promo costs
Ignores competition
What % to use?
Backwards!
Why is the percent of sales method backwards
Marketing -> demand -> sales
Sales -> marketing?
Advertising increases when sales increase and declines when sales decline?
We may want to increase advertising when sales are declining
Share of market/voice budget
Allocate based on desired share of market
If I want x% of market share then I should spend y*x% of industry advertising dollars
Share of media voice = share of consumer mind = market share
Allocate based on desired share of market
If I want x% of market share then I should spend y*x% of industry advertising dollars
Share of media voice = share of consumer mind = market share
Share of market/voice budget
Share of market/voice is commonly used for
New product introductions
Pros of share of market/voice budget (2)
Considers competition
Related to marketing objectives
Cons of share of market/share of voice (2)
What is proper ratio (y)?
Difficult for long term planning (industry keeps changing)
What is the most common type of budget
Objective/task budget
Objective/task budget
Define objectives, determine strategy, estimate cost to execute strategy
Used by the majority of major national advertisers in the us
Forces companies to think in terms of accomplishing goals
Define objectives, determine strategy, estimate cost to execute strategy
Objective/task budget
Three steps of objective/task budget
- Define objectives
- Determine strategy
- Estimate cost
Pros of objective/task budget (2)
Explicitly considers promo goals/objectives
Adaptable to changing market conditions
Cons of objective/task budget (3)
Time consuming
Difficult
Relies heavily on judgements/assumptions
Computer-based programs that rely on data, history, and assumptions
Quantitative models budget
Quantitative modeling budget
Computer-based programs that rely on data, history, and assumptions
Pros of quantitative modeling (4)
Rigorous
Systematic
Quantitative
Objective
Cons of quantitative modeling (3)
Time consuming (have to have the data, define the variables)
Need accurate historical data
Confounding factors
Determine allocation by running experimental tests in different markets with different budgets
Empirical budgeting
Empirical budgeting
Determine allocation by running experimental tests in different markets with different budgets
Pros of empirical budgeting (2)
Based on actual marketing experience
Persuasive with top management
Cons of empirical budgeting (4)
Time consuming
Confounding factors
Willing to sacrifice markets?
Lag effect(s)
