Setting the Advertising Budget

Setting the Advertising Budget

After determining its advertising objectives, the company next sets its adver­ tising budget for each product. The role of advertising is to create demand for a

product. The company wants to spend the amount needed to achieve the sales goal. Four commonly used methods for setting the advertising budget were discussed in Chapter 18. Here we describe some specific factors that should be

considered when setting the advertising budget: • Stage in the product life cycle. New products typically need large advertising

budgets to build awareness and to gain consumer trial. Mature brands usually require lower budgets as a ratio to sales.

• Market share. High­market­share brands usually need more advertising spending as a percentage of sales than do low­share brands. Building the market or taking share from competitors requires larger advertising spending than does simply maintaining current share.

• Competition and clutter. In a market with many competitors and high advertising spending, a brand must advertise more heavily to be heard above the noise in the market.

• Advertising frequency. When many repetitions are needed to present the brand's message to consumers, the advertising budget must be larger.

• Product differentiation. A brand that elosely resembles other brands in its product class (coffee, laundry detergents, chewing gum, beer, soft drinks) requires heavy advertising to set it apart. When the product differs greatly from competitors, advertising can be used to point out the differences to consumers/'

Important Decisions in Advertising 9 797

Setting the advertising budget is no easy task. How does a company know if it is spending the right amount? Some critics maintain that large consumer packaged­goods firms tend to overspend on advertising, while industrial compa­

nies generally underspend on advertising. They also claim that, on the one hand, the large consumer companies use lots of image advertising extensively without really knowing its effects, overspending as a form of 'insurance' against not spending enough. Furthermore, what these companies decide to spend is based on traditional rules of thumb, such as what can be afforded or normal industry

advertising/sales ratios, which have little local validity. 7 On the other hand, indus­

trial advertisers tend to rely too heavily on their sales forces to bring in orders, underestimating the power of the company and product image in preselling indus­

trial customers. Thus they do not spend enough on advertising to build customer awareness and knowledge.

How much impact does advertising really have on consumer buying and brand loyalty? A research study analyzing household purchases of frequently

bought consumer products came up with the following surprising conclusion: Advertising appears effective in increasing the volume purchased by loyal

buyers but less effective in winning new buyers. For loyal buyers, high levels of exposure per week may be unproductive because of a leveling off of ad effectiveness ... Advertising appears unlikely to have some cumulative effect that leads to loyalty ... Features, displays, and especially price have

a stronger impact on response than does advertising. 8

These findings did not sit well with the advertising" community, and several people attacked the study's data and methodology. They claimed that the study measured mostly short­run sales effects. Thus it favoured pricing" and sales promotion activities, which tend to have more immediate impact. In contrast, most advertising takes many months, or even years, to build strong brand pos­ itions and consumer loyalty. These long­run effects are difficult to measure.

However, recent research, which examined data over a ten­year period, found that advertising" docs produce long­term sales growth, even two years after a

campaign ends. 1 * This debate underscores the fact that measuring the results of advertising spending remains a poorly understood subject. Companies can use advertising­expenditure models to help them decide how much to spend. An early model developed by Vidale and Wolfe called for a larger advertising budget ­ the higher the sales­response rate, the higher the rate at

which customers forget the advertising and brand, and the higher the untapped sales potential. 111 Such n model does not, however, consider competitors' adver­ tising and whether or not the firm's ads are effective. An adaptive­control mode! lias the firm experimenting with different rates of expenditure and measuring" sales response to different levels of spending. Suppose the company has set an

advertising expenditure rate based on its most recent information on sales response. It spends this rate in all of its markets except in a subset of 2n markets randomly chosen. In n test markets, the firm spends at a lower rate, and in the

other n, a higher rate. This provides sales response to low, medium and high rates of advertising spend that is used to update the parameters of the sales­response function currently used. The updated sales­response function is used to determine the best advertising budget for the next period. 11