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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 brand 101 gained a 12.6 percent market share by spending 34 percent of the total advertising dollars in this category. Likewise, brand 401 in the toiletry industry had a 30 percent share of advertising dollars to gain 19.5 percent of sales.

To determine how much to spend, marketers often develop a payout plan that determines the investment value of the advertising and promotion appropriation. The basic idea is to project the revenues the product will generate, as well as the costs it will incur, over two to three years. Based on an expected rate of return, the payout plan will assist in determining how much advertising and promotions expenditure will be necessary when the return might be expected. A three-year payout plan is shown in Figure 7-20. The product would lose money in year 1, almost break even in year 2, and finally begin to show substantial profits by the end of year 3.

The advertising and promotion figures are highest in year 1 and decline in years 2 and 3. This appropriation is consistent with Peckham's findings and reflects the additional outlays needed to make as rapid an impact as possible. (Keep in mind that shelf space is limited, and store owners are not likely to wait around for a product to become successful.) The budget also reflects the firm's guidelines for new product expenditures, since companies generally have established deadlines by which the product must begin to show a profit. Finally, keep in mind that building market share may be more difficult than maintaining it—thus the substantial dropoff in expenditures in later years.

While the payout plan is not always perfect, it does guide the manager in establishing the budget. When used in conjunction with the objective and task method, it provides a much more logical approach to budget setting than the top-down approaches previously discussed. Yet on the basis of the studies reported on in Figure 7-17, payout planning does not seem to be a widely employed method.

Quantitative Models Attempts to apply quantitative models to budgeting have met with limited success. For the most part, these methods employ computer simulation models involving statistical techniques such as multiple regression analysis to determine the relative contribution of the advertising budget to sales. Because of problems associated with these methods, their acceptance has been limited, as demonstrated in the figures reported earlier in Figure 7-17. Quantitative models have yet to reach their potential. As computers continue to find their way into the advertising domain, better models may be forthcoming. Specific discussion of these models is beyond the scope of this text, however. Such methods do have merit but may need more refinement before achieving widespread success.

Summary of Budgeting Methods There is no universally accepted method of setting a budget figure. Weaknesses in each method may make it unfeasible or inappropriate. As Figure 7-17 shows, the use of the objective and task method continues to stay high, whereas less sophisticated methods vary. More advertisers are also employing the payout planning approach.

In a more recent study of how managers make decisions regarding advertising and promotion budgeting decisions, George Low and Jakki Mohr interviewed 21 managers in eight consumer-product firms. Their research focused on the decision processes and procedures used to set spending levels on the factors that influence the allocation of advertising and promotion dollars.

Year 1

Year 2

Year 3

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