Cutting Budgets When Times Get Tough Wise Strategy or Potential Pitfall

A downturn in the U.S. economy led a number of companies to slash their advertising budgets significantly in 2001 and 2002. Even the top spenders cut deeply, with GM cutting the budget by 24 percent and the top 10 overall spending 7 percent less on the average. The companies seemed to be saying that since sales are down, advertising expenditures should go down. But is this the right thing to do? A lot of companies don't think so.

For example, not all of the top 10 advertisers slashed budgets (though 7 of them did). Some like AOL and AT&T actually increased expenditures. For these companies, the downturn is viewed as an opportunity rather than a threat. They take a "spend now, win later" approach, viewing such expenditures as an investment rather than a cost. Take Monster.com as an example. While many dot-coms announced advertising cuts for 2002, Monster indicated that it would maintain its advertising expenditures and number of ads constant. Not only that, but it announced that it would spend additional promotional dollars in other areas. In the first quarter of 2001 Monster invested $37.4 million in measured media, as opposed to $28.7 in the same period for 2000. The same amount was budgeted for 2002. In addition, Monster paid more than $10 million

to be part of the Winter Olympics in Salt Lake City.The company is also negotiating for advertising on the 2003 Super Bowl. Monster has also kept its print budget the same, though it is increasing expenditures online.

What does Monster know that others do not? The goal of the new Monster campaign is to raise brand awareness. The company believes that in a time when the economy is down and layoffs may occur, a job placement firm has a golden opportunity to gain by increased investing. Jim Dietz, president of Andover Franchising, Inc., agrees with this philosophy. As Dietz notes,"Pink slips can help us. When downsizing is in the headlines, more folks are willing to look at making an investment in themselves." Andover has increased its expenditures, as well as its media options. Primarily an online advertiser, its 2002 plan included print ads in Entrepreneur and Franchise Times magazines.

To encourage advertisers to consider ad dollars as an investment rather than an expense, the American Advertising Federation (AAF) has initiated a "Great Brands" campaign, debuting with two 15-second TV spots and a number of print ads encouraging marketers not to neglect market spending during the slump. Wally Snyder, CEO of the AAF, notes: "The companies behind leading global brands ... recognize that advertising dollars translate into increased market share." The first two companies featured in the campaign are Intel and Coca-Cola.

Thus, while some companies cut, others increase expenditures in a down economy. Much of the reason for this is rooted in the underlying philosophy as to what advertising is all about—an investment or a cost of doing business.

Sources: Erin Strout,"Spend Now, Win Later," Sales & Marketing Management, April 2002, pp. 65-66; Hillary Chura,"Monster.com Beefs Up Ad Plans," www.Adage.com, Dec.3,2001, pp. 1-2; Vanessa O'Connell,"Ad Spending in All Media Is Slashed 5.2%," The Wall Street Journal, June 8,2001, p. B6.

returns. Like other aspects of the firm's efforts, advertising and promotion are expected to earn a certain return.

While the ROI method looks good on paper, the reality is that it is rarely possible to assess the returns provided by the promotional effort—at least as long as sales continue to be the basis for evaluation. Thus, while managers are certain to ask how much return they are getting for such expenditures, the question remains unanswered and as shown in the chapter introduction, depends on the criteria used to determine effectiveness. ROI remains a difficult method to employ. 223

Belch: Advertising and IV. Objectives and 7. Establishing Objectives © The McGraw-Hill

Promotion, Sixth Edition Budgeting for Integrated and Budgeting for the Companies, 2003

Marketing Promotional Program Communications Programs

Summary of Top-Down Budgeting Methods You are probably asking yourself why we even discussed these budgeting methods if they are not recommended for use or have severe disadvantages that limit their effectiveness. But you must understand the various methods used in order to recognize their limitations, especially since these flawed methods are commonly employed by marketers throughout the United States, Europe, and Canada, as demonstrated in the results of a number of research studies shown in Figure 7-17. Tradition and top management's desire for control are probably the major reasons why top-down methods continue to be popular.

As shown in Figure 7-17, the use of percentage-of-sales methods remained high over the periods included, particularly the method based on anticipated sales. Unfortunately, the affordable method appeared to be on the increase. On the decrease are two methods not yet discussed: quantitative models and the objective and task method. Let us now turn our discussion to these methods as well as one other, payout planning.

Build-Up Approaches The major flaw associated with the top-down methods is that these judgmental approaches lead to predetermined budget appropriations often not linked to objectives and the strategies designed to accomplish them. A more effective budgeting strategy would be to consider the firm's communications objectives and budget what is deemed necessary to attain these goals. As noted earlier, the promotional planning model shows the budget decision as an interactive process, with the communications objectives on one hand and the promotional mix alternatives on the other. The idea is to budget so these promotional mix strategies can be implemented to achieve the stated objectives.

Objective and Task Method It is important that objective setting and budgeting go hand in hand rather than sequentially. It is difficult to establish a budget without spe-

Figure 7-17 Comparison of methods for budgeting

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