The Budgeting Decision

How Much Can I Spend and How?

Role of Economic Theory

Traditional Thought• More $

Advertising• More $

Incremental Sales Relationship Shows

Diminishing Returns

S-Shaped Curve• Reflects the

Investment Nature of Advertising and the PLC

Reflects Increasing Returns at Lower Levels of Expenditure

Traditional Approaches to Appropriation Judgmental Approaches

• Arbitrary Allocation• % of Sales• All You Can Afford

Data-Oriented Approaches• Competitive Parity• Objective and Task• Experimentation and Testing• Modeling and Simulation

Arbitrary Allocation

Common Method Shortcomings

Numerous• vent for personality

and emotion• does not consider

task at hand• little concern for

bottom line impact

Percentage of Sales

Determination of % of Sales Applied to Past or Forecasted Sales

Percentages Vary by Industry

Common Approach

Percentage of Sales

Widely Used for a Number of Reasons

• Costs viewed as a % of Sales

• Minimizes Risk of Nonavailability of Funds

• Competitive Warfare May Be Reduced

Percentage of Sales!Problems! Views Advertising as the Results (Not

Cause) of Sales Focus not on Promotional Job to be

Accomplished Arbitrary Method Substituted for

Comprehensive Analysis Seldom Sufficient unless in a Static

Environment

All You Can Afford Method

Not Usual to Limit Advertising to Show Satisfactory Profits in a Given Year

Management Spends What Believe Will Not Interfere With Liquidity

All You Can Afford Example Selling Price $ 1.00 Retailer Margin(30%) - .30 Wholesaler’s Selling P .70 Wholesaler’s Margin - .11 Manufacturer’s P .59 Manufacturer’s Prod Cost .40 Revenues - Cost .19 Specified Profit (6%) .06 Residual .13

All You Can Afford

Budget Set by Taking (for example)• $.10 x projected Sales of 100,000 units• Total Expenditures = $10,000

What’s the Problem? This Looks Technical!• It doesn’t have anything to do with the

tasks at hand or your objectives!

Data Oriented Approaches Competitive Parity Objective and

Task Experimentation

and Testing Computer

Simulation and Modeling

Competitive Parity

Emulate the Competition Information Gathered from Annual Reports,

IRS information, trade associations Advantages - competition recognized,

adapt to competitive changes Disadvantages - old info, assume equal

effectiveness and objectives, must guess future!

Objective and Task : The Way to GO! No Previous Method

Comes Close! Build-Up Approach

to Analysis Considers

Objectives and the Associated Cost with Implementation of Strategy

Objective And Task: Advantages Considers Marginal Costs Investigates Prioritizing

Objectives Looks at Marginal Returns Avoids Arbitrary Decisions Allows for Flexibility and

Reconciliation of Divergences

Objective and Task: The Steps Isolation of Objectives

• Estimate Market Share Considerations• Approximate Necessary Spending Levels• Set Communication Objectives

Determination of Expenditures Through Build-Up Analysis• Advertising and Public Relations

Considerations

Expenditures Through Build-Up Analysis Advertising and PR

• Review Objectives– Frequency vs. Reach– Use of Media and Mix Decisions– Costs of Media Selected– Determination of Promotional Mix

Direct Selling Costs• channel cooperation expenses

Objective and Task : Completion Steps Comparison Against Industry Percentage of Sales

Guidelines Comparison Against Projected Percentage of

Future Sales Reconciliation of Divergences Establishment of Payout Plan Modifications with Corporate Policies Specification of When Expenditures Will be Made Flexibility

Objective and Task : Problems? Management may not know how to

accomplish stated objectives or how to assign a dollar value to this

May not be able to prioritize objectives

Effectiveness of management not guaranteed!

Experimentation and Testing Select a test market and introduce a

variety of promotional budgets and tactics.

Sales compared across approaches Advantages

• can control market factors• see what works and doesn’t!

Experimentation and Testing Disadvantages

• Cost runs high!• Representativeness of Test Markets• Time Required• Tip Hand to the Competition

Modeling and Simulation

Mathematically Model the Marketplace Simulate Experimentation through the

Computer Model Allows to Analyze Changes to the

Budget and Strategies and View Impact Results only as Good as the Model!