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 brands 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 years 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 competitors expenditures by matching competitiors % 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 approach Objective and task method:

1.Establish advertising objectives

( Create brand awareness Among 30% of target market)

2. Determine specific strategies & Tasks

( Advertising on national TV network, radio Newspapers, magazines)

3. Estimate associated costs of each task

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

Build up approach Pay 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 brands sales.

Build up approach Pay out planning

A new brand XYZ 1 year
Sales Profit contribution ( @ 50%) Advertising Profit ( loss) Cumulative profit ( loss) 15.00 7.50 15.00 (7.50) (7.50)

figures : (Rs. Millions) 2 year

35.50 17.75 10.50 7.25 (0.25)

3 year
60.75 30.38 8.50 21.88 21.63

Build up approach Pay 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 approach Quantitative 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 approach The 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 approach The 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 & potential It 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 Goals Spending on advertising is related to maintaining and increasing the brands market share. It also depends upon the ratio of brands market share with its SOV ( share of voice) SOV is the brands 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

High

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

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

Comp etitor s share of voice

Attack with large SOV premium; Spend approximately twice that of competitor and sustain for a year

Maintain a modest ad spending premium: Set your SOV at least at the level of competitor

Low

low

Your brands market share

high