In Which Sales Budgeting Approach Is The Amount Of Money Spent Based On Past Or Anticipated Sales?

7.1 Budgeting Methods

Learning Objectives

Afterward studying this section, students should be able to practice the following:

1. Recognize the two primary top-downwardly budgeting methods.
2. Place the pros and cons of the height-down budgeting methods.
3. Recognize the two primary bottom-up budgeting methods.
4. Discuss budget allocation and the importance of timing in budgeting.

Upkeep decisions are afflicted by conditions both internal and external to the customer. One key external influence is the overall economic condition of the land and how this affects the customer's industry. Even the nearly inspired advertising may non motivate consumers to open their wallets in troubled times like now. We run into this situation at present quite clearly, for example, in the automotive manufacture, as the stock market and credit crises have made money deficient, and consumers are pressed to pay college prices for gasoline, dwelling heating, groceries, and other necessities. It's non surprising, then, that automotive advertizing spending in the United States dropped to $ane.99 billion in the outset quarter of 2008. That sounds like a lot of coin (and it is!)—only information technology'southward downwardly more than than xiv percent compared with the aforementioned time a year earlier. As i industry executive observed, advertizing spending is "sinking as fast as new car sales." When times are tough, nothing is sacred: Even Tiger Forest' nine-twelvemonth relationship as a fixture in General Motors' advertizement got the axe equally the industry tries to slash its costs.Quoted in "Auto Advertisement Spending Down, Except Digital," eMarketer, July 23, 2008, http://www.emarketer.com/Article.aspx?id=1006426&src=article1_newsltr (accessed July 23, 2008); Rich Thomaselli, "GM Ending Tiger Woods Endorsement Deal," Advertising Age, November 24, 2008, http://adage.com/article?article_id=132810 (accessed Nov 28, 2008); http://adage.com/commodity?article_id=46288& search_phrase=shona%20seifert.

Top-Downwards Budgeting

In top-down budgetingMethod in which top management sets the amount the company will spend on promotional activities for the year; it is allocated amongst all of the company'due south ad, PR, and other promotional programs. , top management sets the overall corporeality the company will spend on promotional activities for the year. This total amount is and so allocated amidst all of the ad, PR, and other promotional programs. How does elevation management get in at the annual promotional budget? Typically, they use a percentage-of-sales method, in which the upkeep is based on the amount the visitor spent on advertisement in the previous year and the sales in that twelvemonth.

Percentage-of-Sales Method

The percentage-of-salesBudgeting method that divides the ratio of the firm'south past almanac promotional budget by by sales to arrive at the percentage of sales; this is applied to expected sales in the coming twelvemonth to get in at the ad budget for that year. method is the ratio of the business firm'south past annual promotional budget divided past past sales to make it at the percentage of sales. That pct of sales is then applied to the expected sales in the coming twelvemonth to arrive at the upkeep for that year. For example, if the company spent $20 million on advertising final twelvemonth and had $100 million in sales, the percent of sales would be twenty percent. If the company expects to achieve $120 million in sales the following year, then twenty percentage of $120 1000000 is $24 million, which would be the budget for advertising that year.

Figure 7.2 Pct-of-Sales Method

Wall Street analysts sometimes expect at changes in the ad-to-sales ratioThe relationship between a company'south promotional upkeep and its sales; this ratio is important to concern analysts in assessing a company's health. as a sign of the wellness of a company. For example, Procter & Chance's ad-to-sales-ratio slipped from 10.7 per centum in 2004 to 9.9 percent in 2006. Those declines came every bit P&G faced growing margin pressure from ascent commodity costs. Some analysts see strong ad spending as an investment in growth or a sign that a company is having no trouble meeting its earnings targets, and so they want to run into an ad-to-sales ratio that is consequent or increasing.Jack Neff, "P&Grand Rewrites its Definition of 'Ad Spend,'" Ad Age, September iii, 2007, three.

Industry Averages Method

Some companies use industry averagesA technique for evaluating ad-to-sales ratios based on the ratios seen in a group of companies in a given industry. (published past trade associations) as a guide to set up their promotional budget. Advertizement-to-sales ratios vary widely depending on the industry. For instance, health services companies had ane of the highest advertisement-to-sales ratios for 2006, at 18.seven percent. Other industries with loftier advertising-to-sales ratios are transportation services (14.2 pct), movement pictures and videotape productions (xiii.seven percent), food (11.9 percent), newspapers (11.i percent), and broadcast tv set stations (10.7 per centum). In contrast, computer and office equipment had an advert-to-sales ratio of 1.ii percent, while computers and software wholesale had only a 0.2 percent advertisement-to-sales ratio.Kate Maddox, "Advertizement Spending Upwardly in '05, '06," B to B, August 8, 2005, 17.

Sometimes a dramatic increase in ad spending by ane competitor in an manufacture spurs others to follow suit. For example, in 2007 German language insurance giant Allianz more than than quadrupled its annual global advertisement budget to 225 million euros later competitor Zurich Financial Services launched a large-calibration global awareness entrada."Allianz Plans €225m Global Branding Blitz," Marketing Week, May 3, 2007, http://goliath.ecnext.com/coms2/gi_0199-6503373/Allianz-plans-225m-global-branding.html (accessed Feb 1, 2009). Similarly, the auto insurance manufacture saw overall ad spending jump more than 32 pct in just two years when GEICO increased its advertizing spending 75 pct in 2004; this spurred competitors to increase their ad budgets as well. Progressive Insurance spent $265 meg in 2006, up from $201 1000000 in 2004, and State Farm besides plans to increase spending, which topped $270 million in measured media in 2006.Mya Frazier, "Geico's $500M Outlay Pays Off," Advertising Historic period, July 9, 2007, viii.

Spending on certain segments of the promotional budget, such equally on coupons, is very much driven by competitor spending levels. Consumer packaged goods companies like P&M and Unilever merits not to like couponing schemes as a promotional activity. Indeed, P&Grand looked into eliminating coupons in 1997 due to declining newspaper circulation and usage. But companies are tied to using coupon promotions. If ane visitor alone decides to forgo couponing, they face losing price-conscious consumers to the competition. If companies try to work together to scale back on couponing, they might exist accused of violating antitrust regulations. As a result, spending on the media side of couponing was up 26 percent in 2006, reaching $1.8 billion, even though consumer use of coupons was downward 13 percent during the aforementioned time menstruation.Jack Neff, "Package-Goods Players Just Tin't Quit Coupons," Advertising Age, May xiv, 2007, 8.

Pros and Cons of Superlative-Downwards Methods

The advantages of tiptop-down approaches are their speed and straightforwardness. The disadvantage is that the methods look to the past as a guide, rather than to future goals. Just considering a visitor spent $forty million on advertising the previous twelvemonth doesn't mean that effigy is right for adjacent year. As well, budgets tied to sales figures mean that a company's promotional budget will subtract if sales decrease—merely in fact increasing the promotional budget may be precisely what is needed in gild to remedy declining sales.

Bottom-Up Techniques

Alternatively, some companies begin the budgeting process each year with a clean slate. They employ bottom-up budgetingMethod in which a company begins the promotional budgeting process each yr with a clean slate, identifying promotional goals and allocating enough money to achieve those goals. techniques, in which they first identify promotional goals (regardless of past performance) and allocate enough money to reach those goals.

Objective-Task Method

The objective-job methodThe nigh common technique of bottom-up budgeting, in which a company sets the objective or chore they want the promotion to attain, then estimates the budget needed to reach it; top management reviews and approves the budget recommendation. is the nearly common technique of bottom-upwardly budgeting. Companies that utilise this method outset fix the objective or task they desire the promotion to accomplish. Adjacent, they estimate the budget they will need to reach that objective or task. Finally, top management reviews and approves the budget recommendation.

For example, champagne maker Moët & Chandon set its objective "to grow the whole market" in the Us.Jeremy Mullman, "Moët, Rivals Pour More Ad Bucks into Bubbly: Champagne Makers Endeavour to Create Year-Round Need," Advertisement Age, September iii, 2007, iv. That is, Moët will apply advertising to increase consumption of champagne throughout the year, not merely over the holidays. Moët based its objective on research that compared champagne consumption in the Usa to that in other countries. "The average U.S consumer drinks half a drinking glass of champagne a year, the average British consumer drinks one-half a bottle and the boilerplate French consumer drinks three bottles. There's clearly room for growth," said Stuart Foster, director of business organization evolution at Moët-Hennessy Usa.Jeremy Mullman, "Moët, Rivals Pour More Ad Bucks into Bubbly: Champagne Makers Try to Create Twelvemonth-Round Demand," Advert Historic period, September 3, 2007, four. Moët more than tripled its U.Due south. advertisement spending in 2006 to $9.5 million from $two.8 meg. Reflecting the objective, the company ran its advertising in the summertime rather than simply around the holidays.

Similarly, Danone Waters is increasing its ad spending in the Britain in 2008 in an effort to increase bottled water consumption amongst British consumers. Danone Waters is increasing its spending by 15 percent, compared to Moët's tripling of advertising expenditures, which shows that in that location is no difficult-and-fast rule about how much budget is needed to reach a given objective.Jeremy Mullman, "Moët, Rivals Cascade More than Advert Bucks into Bubbly: Champagne Makers Endeavour to Create Year-Round Demand," Advert Historic period, September iii, 2007, 4; "Danone Waters Plans to Increase Spend by 15%," Marketing, July 25, 2007, 4.

Other objectives advertisers can set include acquiring new customers, retaining existing customers, or building the brand. The objective to acquire new customers often requires a bigger budget than the advertising the firm needs to retain existing customers.

Stage-Based Spending

Some companies use the product life cycle methodStage-based budgeting technique that allocates more coin during the introduction phase of a new production than in afterward stages when the production is established. , in which they allocate more than money during the introduction stage of a new production than in after stages when the product is established. For example, Procter & Run a risk allocated $15 million to advertising Dawn Simple Pleasures, a new liquid detergent product that comes with a carve up air freshener fastened to the base of the bottle. It allocated less money ($x–12 million) for Dawn Straight Cream, a product it launched two years prior.Vanessa L. Facenda, "Procter Dishes out three-Tiered Dawn Attack," Brandweek, September 24, 2007, 4. The demand to spend heavily to promote new products is especially strong for pharmaceutical companies when they introduce new drugs. Pharmaceutical companies need to get physicians to talk about their drugs and prescribe them.

In contrast, companies such equally baby nutrient manufacturers need to invest in potent promotion on a continual basis, because they get a new prepare of customers every year. "We provide stiff consumer promotion back up to drive trial, particularly in our baby segments, where we take a new group of consumers inbound the market place each year," said Randy Sloan, executive vice president and general director at Del Pharmaceuticals, which is the number one advertiser in teething pain relief, children's toothpaste, and developed oral pain products.Quoted in "A Targeted Approach Creates a Powerhouse," Concatenation Drug Review, June four, 2007, 34.

SS+K Spotlight

Since msnbc.com's financial year runs from July to June, Catherine Captain and all other department heads must first submitting their budget requests in March and then that the board can make up one's mind their budgets before the next fiscal year starts. They apply a lesser-upward strategy based on objectives, but sales are too a vital role of determining what the final spend will be.

Video Spotlight

Catherine Helm

(click to meet video)

Catherine Helm talks about the relativity of budget sizes.

Upkeep Allocation and Timing

In add-on to deciding how much to spend, companies need to know when they will be spending the money.

Figure 7.3 msnbc.com Budget Allocation

For some companies, the timing is smooth. Equally we saw with the Moët champagne example, the company will spend its upkeep throughout the yr. Many other businesses footstep up their advertising in the weeks leading upward to the Christmas holiday season. Others, such equally beach clothes makers or dwelling comeback companies whose work is done in warm weather, may concentrate their spending during a item time of year.

Keep in mind that the budget needs to pay for more than just creating the ads and buying the media to run them. Consider a beachwear campaign for an dress maker equally an example. Although well-nigh of the entrada budget is spent in the second quarter on media buys to hit consumers with swimsuit ads as they gear upwardly for summer, the advertising bureau has to allocate some of the money to laying the groundwork for this campaign. It will need to spend some money in the earlier role of the year to pay for market enquiry, ad development, and testing. Later on the ads run, the last of the budget might go to appraise the campaign'south effectiveness.

Other factors that contribute to budgeting:

• Media costs: For retailers, the vacation season is a popular time, so similar all things supply and demand, media costs tend to go up during that time.
• Production costs: An incredible number of components contribute to making an advert, whether it'south TV, Spider web banner, or print, and the price can vary widely, which is important to consider when you build a bottom-up upkeep.

SS+K Spotlight

While a lump sum upkeep had been approved for SS+K to spend, Catherine Captain and msnbc.com had to be responsive to their internal revenue situations. In other words, if they weren't hitting other advertisement sales objectives, they were not going to be set up to pull the trigger on the disbursement of millions of dollars.

Figure 7.4 Budget Snapshot of the Elements and Timing for the msnbc.com Campaign

SS+Thousand outlined each element of the production and when the agency would accept to have the client'southward money fully committed and available to spend. Part of the business relationship management team's responsibility is to manage the schedule by which everyone gets paid for her part in a production.

Video Spotlight

Catherine Captain

(click to see video)

Catherine Captain explains the importance of the first marketing budget and what would happen if it didn't become well.

Fundamental Takeaway

Clients utilize a multifariousness of methods to determine their advertising budgets. I bones distinction is between top-downward and bottom-up methods. Peak-down approaches are easier; they basically use last year's expenditures equally a starting point. However, they too are more simplistic and may be self-defeating because they wind up allocating more money to promote products that are doing well at the expense of products that are doing poorly—when but the opposite adjustment may brand more than sense. Bottom-up approaches start by specifying the particular objectives a house has for a brand and and then estimating how much information technology volition cost to run into those objectives. Budget-setting is more complicated than merely tallying up what it costs to brand and identify advertizing; the client too has to consider the resources an bureau will need to conduct research, develop an ad strategy, and measure how well the strategy worked and so it can tweak the approach in the future if necessary.

Exercises

1. Compare and contrast top-downwards budgeting with bottom-up budgeting.
2. Describe when advertisers should use the percentage of sales and industry averages methods for budgeting.
3. Describe when advertisers should utilise the objective-and-task and phase-based spending methods for budgeting.
4. Describe and explain the factors that contribute to proper budget resource allotment and timing.

Source: https://saylordotorg.github.io/text_launch-advertising-and-promotion-in-real-time/s10-01-budgeting-methods.html

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