PPT on Budget Allocation in IMC

Prepared by : Prof. M.K.Pendse

Budget allocation

Marketers should consider some specific factors when setting the advertising budget:

1. Product life cycle stage:New products typically need a large advertising budget to create awareness, develop preference, & induce trial/ purchase. Mature brands usually require lower budget as a ratio of sales

Budget allocation

2. Market share: brands with high market share usually need

more budget allocation as they concentrate on beating the competitors .

3. Intensity of competition:In a market with many competitors and high

spending on advertising , there is bound to be advertising clutter . A brand must advertise more heavily to be heard above the noise in the market.

Budget allocation

4. Advertising Frequency:When many advertising repetitions are needed to

communicate the brand’s message to the target audience, the advertising budget must be large.

5. Product differentiation:When a brand cannot be differentiated significantly

and resembles other brands in a product category, then it requires heavy advertising budget to set it apart from competitors.

Approaches to Budgeting: Top-down approach

Top management sets the spending limit

Advertising budget set to stay with in the allocation limit

Types of Top-down approach

The Affordable Method ( All-you-can-afford method): After all other allocations have been made to cover other relevant company expenditures, whatever is left is allocated to the advertising , considering that this is what the company can afford to spend on the advertising. No consideration is given to what is expected out of advertisement.This method suffers from 2 sets of drawbacks i.e. either the firm is under spending or it is overspending.

Types of Top-down approach

The Arbitrary allocation Method:

This method of budget allocation seems to have no theoretical basis.

The top mgmt. determines the budget on the basis of what is felt necessary.

Budget allocation is no where related to advertising objectives.

Types of Top-down approach The Percentage of Sales Method:

The basis used here is the total sales of the brand or product.

In a simplest allocation , a fixed % of last year’s sales figure is allocated as the budget.

Ex: 10% of sale in the year 2006-07 (10,00,000) = Rs. 1,00,000/- as BA

A variation is to calculate the average sales of the last several years to decide budget allocation.

Another variation is to determine a fixed amount of unit product cost as advertising expense and multiplied by the number of projected sales unit. Ex: Cost of manufacturing jeans = 200/-

Advertising money allocated per unit= 20/- Projected sales unit = 50000 in a coming year

Types of Top-down approach The Percentage of Sales Method:

The basic premise of this method is that sales are causing advertising.

In case of innovative product this method is difficult to implement.

Types of Top-down approach The Competitive Parity Method:

Here the advertisers base their advertising budget allocation on competitor’s expenditures by matching competitior’s % of sales method.

The inherent assumption here seems to be that all the firms have similar advt. objectives & their allocations are correct which may be far from true.

Approaches to Budgeting: Build-up approach

Advertising objectives are set

Activities necessary to achieve objectives are planned

Cost of different advertising elements are budgeted

Total advertising budget is approved by top management

Build up approach

Objective and task method:The objective task method is based on

Build up approach.It involves higher degree of managerial

involvement.This budget decision is well suited to

new product introduction.It is popular method among large

companies.

Build up approachObjective and task method:

2. Determine specific strategies & Tasks

( Advertising on national TV network, radioNewspapers, magazines)

3. Estimate associated costs of each task

( Media cost : TV, Radio, Newspaper, Magazines)

1.Establish advertising objectives( Create brand awareness Among 30% of target market)

Build up approachPay out planning

In this method the basic idea is to develop a projection of revenues that product will generate and the cost it will incur over a period of 2 to 3 years.This approach acknowledges the possibility that the company profits will decrease in first year or 2 . Here the Managers show a keen interest in knowing how much money needs to be invested in advertising and for how long before the brand gets established and expected profits flow from the brand’s sales.

Build up approachPay out planning

A new brand ‘XYZ’

figures : (Rs. Millions)

1 year 2 year 3 yearSales

Profit contribution ( @ 50%)

Advertising

Profit ( loss)

Cumulative profit ( loss)

15.00

7.50

15.00

(7.50)

(7.50)

35.50

17.75

10.50

7.25

(0.25)

60.75

30.38

8.50

21.88

21.63

Build up approachPay out planning

This method is used in conjunction with other budgeting methods.

The limitation of this method is that it cannot account for all the uncontrollable factors such as competition, technological changes, government policies etc.

It is not popular among companies.

Build up approachQuantitative Models

Some techniques were developed and involved the use of mathematical models & statistical techniques such as multiple regression analysis to determine the relative contribution of advertising expenditure to sales.These methods require the use of computers.This method is not accepted widely in the industry as it requires experimentation & analysis and employees with proper expertise .

Build up approachThe Experimental approach

this method is used as an alternative to the statistical approaches & mathematical models.Brand managers uses tests & experiments in one or more selected market areas.Feedback data from these experiments and tests is used to determine the advertising budget.

Build up approachThe Experimental approach

A brand is tested in several market areas with similar population, level of brand usage, & brand share.Different advertising expenditures are kept for each market.Brand awareness and sales levels are measured before, during & after the test in each market. Results are compared and estimates can be developed on how budget variations might influence advertising nationwide.Drawback of this method is expenses & time involved and the impact of environmental factors on the outcome of such test.

Factors affecting budget allocation

Market size & potentialIt is easier & less expensive to reach the target audience in

smaller market.Region wise market potential must be studied before allocating

the budget.Market Share GoalsSpending on advertising is related to maintaining and

increasing the brand’s market share.It also depends upon the ratio of brand’s market share with its

SOV ( share of voice) SOV is the brand’s advertising expenditure as a % of the total

product category advertisement.A brand is called a profit making brand if its SOV is clearly

above its share of market.

SOV effect and budgeting strategies for individual markets

decrease Increase to defend

Follow a niche strategy , retreat and focus , reduce ad spending

Attack with large SOV premium;

Spend approximately twice that of competitor and sustain for a year

Follow defensive strategy, increase ad spending to match that of competitor

Maintain a modest ad spending premium:

Set your SOV at least at the level of competitor

Competitor’s share of voice

Low

High

low high

Your brands market share