ADVERTISING BUDGET

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BUDGETING APPROACHES

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Top Down Budgeting

Bottom Up Budgeting

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Top Down Approaches

The Affordable Method Arbitrary allocation Percentage of sales Competitive parity Return on Investment (ROI)

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Bottom Up Budgeting

Objective and Task Method Pay Out Planning Quantitative Models

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The Affordable Method

All- you can afford method Firm determines the amount to be spent in various areas such as production and operations. Then allocates whats left to advertising and promotion. This approach is common among small firms. Some high tech firms uses this method the product if good enough, will sell itself

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Arbitrary Allocation

Budget is determined by management solelybased on psychological profile of managers. No systematic thinking has occurred No objectives have been set . Not recommended method

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Percentage of Sales Method

Most commonly used method (particularly in large firms) Based on sales of the product (based on past or future sales). Mgmt determines the amt either

Taking a percentage of sales dollars Assigning a fixed amt of the unit product cost to promotion and multiplying this amt by the no: of units sold.

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Percentage allocated varies from one industry to another.

ie; Some firms budget a very small percentage(eg: 0.7% in lumber and wood products) and others spend a much higher proportion(eg: 12% in the games and toys industry)

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Advantages

It is financially safe and keeps ad spending within reasonable limits Simple, straight forward and easy to implement

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Disadvantages

It treats advertising as an expense associated with making a sale rather than an investment. It may result in severe misappropriation of fundsif products with low sales have smaller promotion budgets, may hinder sales progress This method is difficult to employ for new product introductions

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Competitive parity

Establish budget amounts by matching the competitors % of sales expenditures. It may leads to promotional wars. Eg. Coke vs. pepsi

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Disadvantages of top down budgeting Methods

These approaches lead to predetermined budget appropriations not linked to objectives and strategies designed to accomplish them.

Bottom top approaches

1.Objective and Task Method

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For Ex:

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Establishing Objectives: Create awareness of product among 20% of target market. Determine specific tasks: advertise on television and radio stations and major newspapers Estimate costs assosiated with tasks: television5,75000; radio- 2,25000; newspaper- 1,75000 rs. This method is easier if there is a past experience to use as a guide

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Pay out planning

Marketers develop a pay out plan This plan projects the revenues the product will generate, aswell as the costs it will incur, over two to three years. It is suitable for new product introductions.

Eg: 3 year Pay Out Plan

Product sales Profit contribution (@ .50/ product) Advertising/promotio 15.0 ns Profit (Loss) (7.5) Cumulative (7.5) Profit(Loss) Year 1 15.0 7.5 Year 2 35.50 17.75 10.50 7.25 (.25)

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Year 3 60.75 30.38 8.50 21.88 21.63

Product will lose money in year 1, almost breakeven in year 2, and finally begin to show substantial profits by the end of year 3

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Quantitative models

These methods employ computer simulation models involving statistical techniques such multiple regression analysis.

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