Chapter 7 Decide What You Can Afford to Say: msnbc.com Sets the Budget

Percentage-of-Sales Method

The percentage-of-salesBudgeting method that divides the ratio of the firm’s past annual promotional budget by past sales to arrive at the percentage of sales; this is applied to expected sales in the coming year to arrive at the ad budget for that year. method is the ratio of the firm’s past annual promotional budget divided by past sales to arrive at the percentage of sales. That percentage of sales is then applied to the expected sales in the coming year to arrive at the budget for that year. For example, if the company spent $20 million on advertising last year and had $100 million in sales, the percentage of sales would be 20 percent. If the company expects to achieve $120 million in sales the following year, then 20 percent of $120 million is $24 million, which would be the budget for advertising that year.

Figure 7.2 Percentage-of-Sales Method

Wall Street analysts sometimes look at changes in the ad-to-sales ratioThe relationship between a company’s promotional budget and its sales; this ratio is important to business analysts in assessing a company’s health. as a sign of the health of a company. For example, Procter & Gamble’s ad-to-sales-ratio slipped from 10.7 percent in 2004 to 9.9 percent in 2006. Those declines came as P&G faced growing margin pressure from rising 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, so they want to see an ad-to-sales ratio that is consistent or increasing.Jack Neff, “P&G Rewrites its Definition of ‘Ad Spend,’” Advertising Age, September 3, 2007, 3.

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 by trade associations) as a guide to set their promotional budget. Ad-to-sales ratios vary widely depending on the industry. For example, health services companies had one of the highest ad-to-sales ratios for 2006, at 18.7 percent. Other industries with high ad-to-sales ratios are transportation services (14.2 percent), motion pictures and videotape productions (13.7 percent), food (11.9 percent), newspapers (11.1 percent), and broadcast television stations (10.7 percent). In contrast, computer and office equipment had an ad-to-sales ratio of 1.2 percent, while computers and software wholesale had only a 0.2 percent ad-to-sales ratio.Kate Maddox, “Ad Spending Up in ’05, ’06,” B to B, August 8, 2005, 17.

Sometimes a dramatic increase in ad spending by one competitor in an industry spurs others to follow suit. For example, in 2007 German insurance giant Allianz more than quadrupled its annual global advertising budget to 225 million euros after competitor Zurich Financial Services launched a large-scale global awareness campaign.“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 February 1, 2009). Similarly, the auto insurance industry saw overall ad spending jump more than 32 percent in just two years when GEICO increased its ad spending 75 percent in 2004; this spurred competitors to increase their ad budgets as well. Progressive Insurance spent $265 million in 2006, up from $201 million in 2004, and State Farm likewise plans to increase spending, which topped $270 million in measured media in 2006.Mya Frazier, “Geico’s $500M Outlay Pays Off,” Advertising Age, July 9, 2007, 8.

Spending on certain segments of the promotional budget, such as on coupons, is very much driven by competitor spending levels. Consumer packaged goods companies like P&G and Unilever claim not to like couponing schemes as a promotional activity. Indeed, P&G looked into eliminating coupons in 1997 due to declining newspaper circulation and usage. But companies are tied to using coupon promotions. If one company alone decides to forgo couponing, they face losing cost-conscious consumers to the competition. If companies try to work together to scale back on couponing, they might be 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 down 13 percent during the same time period.Jack Neff, “Package-Goods Players Just Can’t Quit Coupons,” Advertising Age, May 14, 2007, 8.

Pros and Cons of Top-Down Methods

The advantages of top-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 because a company spent $40 million on advertising the previous year doesn’t mean that figure is right for next year. Also, budgets tied to sales figures mean that a company’s promotional budget will decrease if sales decrease—but in fact increasing the promotional budget may be precisely what is needed in order to remedy declining sales.

Objective-Task Method

The objective-task methodThe most common technique of bottom-up budgeting, in which a company sets the objective or task they want the promotion to achieve, then estimates the budget needed to achieve it; top management reviews and approves the budget recommendation. is the most common technique of bottom-up budgeting. Companies that use this method first set the objective or task they want the promotion to achieve. Next, they estimate the budget they will need to accomplish 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 United States.Jeremy Mullman, “Moët, Rivals Pour More Ad Bucks into Bubbly: Champagne Makers Try to Create Year-Round Demand,” Advertising Age, September 3, 2007, 4. That is, Moët will use advertising to increase consumption of champagne throughout the year, not just over the holidays. Moët based its objective on research that compared champagne consumption in the United States to that in other countries. “The average U.S consumer drinks half a glass of champagne a year, the average British consumer drinks half a bottle and the average French consumer drinks three bottles. There’s clearly room for growth,” said Stuart Foster, director of business development at Moët-Hennessy USA.Jeremy Mullman, “Moët, Rivals Pour More Ad Bucks into Bubbly: Champagne Makers Try to Create Year-Round Demand,” Advertising Age, September 3, 2007, 4. Moët more than tripled its U.S. ad spending in 2006 to $9.5 million from $2.8 million. Reflecting the objective, the company ran its advertising in the summer rather than just around the holidays.

Similarly, Danone Waters is increasing its ad spending in the United Kingdom in 2008 in an effort to increase bottled water consumption among British consumers. Danone Waters is increasing its spending by 15 percent, compared to Moët’s tripling of ad expenditures, which shows that there is no hard-and-fast rule about how much budget is needed to reach a given objective.Jeremy Mullman, “Moët, Rivals Pour More Ad Bucks into Bubbly: Champagne Makers Try to Create Year-Round Demand,” Advertising Age, September 3, 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 money during the introduction stage of a new product than in later stages when the product is established., in which they allocate more money during the introduction stage of a new product than in later stages when the product is established. For example, Procter & Gamble allocated $15 million to advertising Dawn Simple Pleasures, a new liquid detergent product that comes with a separate air freshener attached to the base of the bottle. It allocated less money ($10–12 million) for Dawn Direct Foam, a product it launched two years prior.Vanessa L. Facenda, “Procter Dishes out 3-Tiered Dawn Attack,” Brandweek, September 24, 2007, 4. The need 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 as baby food manufacturers need to invest in strong promotion on a continual basis, because they get a new set of customers every year. “We provide strong consumer promotion support to drive trial, particularly in our baby segments, where we have a new group of consumers entering the market each year,” said Randy Sloan, executive vice president and general manager at Del Pharmaceuticals, which is the number one advertiser in teething pain relief, children’s toothpaste, and adult oral pain products.Quoted in “A Targeted Approach Creates a Powerhouse,” Chain Drug Review, June 4, 2007, 34.

SOV for Small Companies

For small companies, share of voice is often not an appropriate metric because there are so many bigger competitors who will outspend the smaller company. The online roadblock tactic might be one way of achieving share of voice that is less expensive. Perhaps a better way to set budgets, however, might be to use the return on investment approach, as we’ll see next.

ROI Is the Real Goal (SOV Is Only the Means to an End)

At the end of the day, then, share of voice is only a means to the end. Ultimately, advertisers want consumers to purchase what they make, not just think their ads are awesome. If the money spent on advertising never generates any returns, then what is the point—other than to improve the bottom lines of ad agencies and enrich the portfolios of creative directors? As Gavin Ailes, business director at The Search Works in the United Kingdom, explained, if a company gets two dollars back for each dollar they invest, “that’s great, they shouldn’t really worry too much whether they have ‘share of voice’ or whatever among a particular group.”Quoted in Sean Hargraves, “Made to Measure,” New Media Age, June 21, 2007, 21.

ROI Makes Advertising Accountable

An Institute of Practitioners (IPA) report entitled Marketing in the Era of Accountability is based on the IPA’s database of effectiveness awards case studies. The report found that advertising campaigns that set hard objectives, such as to “improve profits,” are more effective than those that focus on intermediate goals, such as degree of brand awareness. Fewer than 20 percent of companies evaluate their communications campaigns on the basis of their effect on profits, however, because it is easier to measure an intermediate metric than an ROI metric.“Marketing Theory: Everything You Know Is Wrong,” Marketing, June 13, 2007, 28.

Visibility: Can You See the ROI?

Some firms are in the enviable position of seeing a return on their investment more directly than others. For example, Domino’s Pizza can see the results of its advertising almost immediately—a TV ad immediately spurs calls to its outlets as people order the ExtravaganZZa Feast the spot featured. As the chain’s marketing director explained, “The time it takes from initial consideration to consumption can be less than an hour. We can see the impact of a TV ad almost immediately.”Quoted in “The Marketing Society Forum—Is a Focus on ROI Hindering Marketing’s Effectiveness?” Marketing, June 20, 2007, 24.

Online advertising is also amenable to rigorous ROI measures. Watching impressions, counting click-throughs, and using cookies let advertising managers know how many people saw an ad, clicked on the ad, and bought from the ad. Web traffic can be tracked, and advertising spending can be aligned to sales.“The Self-Assured Industry,” Marketing Week, June 14, 2007, 28.

ROI Requires More Profit, Not Just More Revenue

Ideally, payback should be about profit, but many companies confuse added profit with added revenue. To avoid these mistakes, clothing manufacturer VF Corp (whose brands include Lee, Wrangler, Nautica, and The North Face, among others) spent two years and millions of dollars studying consumer responses to its marketing efforts while seeking to determine which of its brands have gotten the best ROI from advertising. “We are convinced we can be more effective by having a better understanding of marketing return on investment and will get paid back on our investment several times over,” said Eric Wiseman, president/COO at VF.

In 2006, VF spent about $325 million on advertising across all its brands. The Nautica brand is already reaping the benefits of VF’s ROI research. The company increased Nautica’s marketing budget the next year. “Our budget is up and we are moving the mix around,” said Chris Fuentes, vice president of marketing at Nautica. “We’ve looked at each element of our marketing—magazines, newspaper, outdoor, sponsorship, public relations—[and] we can isolate what is working. We’re understanding now what is driving consumption and building brand equity.”

The research helped the company decide that Nautica’s advertising budget should be increased because the advertising was providing a good return on investment. What’s more, the research helped Nautica pinpoint which of its campaigns were most effective in bringing that return. Nautica is using that information to decide how to allocate its advertising budget. Nautica uses an integrated marketing program of print, outdoor, and Internet advertising. The research showed that newspaper ads generated underachieving results, so Nautica will spend less on them, but it will boost its Internet presence to target young men for its new N series jeans. Nautica spent $20 million on ads in 2006.Quoted in Sandra O’Loughlin, “VF Designs Dynamic Future for Lee, Wrangler, Nautica: ROI Study Spurs Aggressive Marketing Plans at $7B Company,” Brandweek April 9, 2007, 16.

ROI for Channel Effectiveness

ROI can also help manage an advertising campaign as effectiveness measures help identify which specific media platforms deliver the best bang for the buck. Nautica relies on its ROI research to drive budget allocation among different campaigns, allocating more to those that have provided the best return in the past. For example, Nautica’s sponsorship of the AVP Pro Beach Volleyball Tour produced good results. So, in 2007, Nautica increased its presence there, adding on-court billboards and a scoreboard bug on the TV screen, and having announcers and pro Misty May outfitted in Nautica apparel.

Avoid Overemphasis on Short-Term ROI

Most advertising ROI metrics tend to focus on short-term profits from the immediate response to an ad. This emphasis is appropriate in some contexts; for example, that’s one of the big advantages of direct marketing, because the firm can immediately trace the impact of a mailing or e-mail blast and decide right away if it boosted orders.

On the other hand, brand-building campaigns produce a low ROI in terms of short-term profits, but they are crucial for the long term. In these cases managers may need to adopt a broader field of vision and be patient, even if they are bleeding red right now. For example, one company discovered that every dollar the company spent on TV advertising yielded only eighty cents back in short-term sales. Executives were thinking of chopping the TV budget, but the general manager said, “Just because print and promotion activities have the highest ROI, doesn’t mean they should get the majority of the money. Print only accounts for a small fraction of total sales, and while TV has a lower ROI, it’s responsible for a huge amount of ongoing sales.”Quoted in Randy Stone, “When Good Returns Mean Anything But,” Brandweek, April 9, 2007, 20. This reasoning shows that the bigger picture must be taken into account when managers make budget decisions. Making this case can be a daunting task for advertising agencies, especially when their clients are under pressure to show profitable returns to their shareholders.