"> f o advertising area. The agency position is that promotional monies are harder to track in terms of effectiveness and may be used improperly if not under its control. (In many cases commissions are not made on this area, and this fact may contribute to the agency's reluctance.)39

The orientation of the agency or the firm may also directly influence where monies are spent. Many ad agencies are managed by officers who have ascended through the creative ranks and are inclined to emphasize the creative budget. Others may have preferences for specific media. For example, BBDO Worldwide, one of the largest advertising agencies in the United States, has positioned itself as an expert in cable TV programming and often spends more client money in this medium. McCann-Erickson is spending more monies on the Internet. Both the agency and the client may favor certain aspects of the promotional program, perhaps on the basis of past successes, that will substantially influence where dollars are spent.

Market Size While the budget should be allocated according to the specific promotional tools needed to accomplish the stated objectives, the size of the market will affect the decision. In smaller markets, it is often easier and less expensive to reach the target market. Too much of an expenditure in these markets will lead to saturation and a lack of effective spending. In larger markets, the target group may be more dispersed and thus more expensive to reach. Think about the cost of purchasing media in Chicago or New York City versus a smaller market like Columbus, Ohio, or Birmingham, Alabama. The former would be much more costly and would require a higher budget appropriation.

Market Potential For a variety of reasons, some markets hold more potential than others. Marketers of snow skis would find greater returns on their expenditures in Denver, Colorado, than in Fort Lauderdale, Florida. Imported Mexican beers sell better in the border states (Texas, Arizona, California) than in the Midwest. A disproportionate number of imported cars are sold in California and New England. When particular markets hold higher potential, the marketing manager may decide to allocate additional monies to them. (Keep in mind that just because a market does not have high sales does not mean it should be ignored. The key is potential—and a market with low sales but high potential may be a candidate for additional appropriations.)

There are several methods for estimating marketing potential. Many marketers conduct research studies to forecast demand and/or use secondary sources of information such as those provided by government agencies or syndicated services like Dun & Bradstreet, A. C. Nielsen, and Audits and Surveys. One source for consumer goods information is the Survey of Buying Power, published annually by Sales & Marketing Management magazine. The survey contains population, income, and retail sales data for states, counties, metropolitan statistical areas, and cities in the United States and Canada with populations of 40,000 or more.

Market Share Goals Two studies in the Harvard Business Review discussed advertising spending with the goal of maintaining and increasing market share.40 John Jones compared the brand's share of market with its share of advertising voice (the total value of the main media exposure in the product category). Jones classified the brands as "profit taking brands, or underspenders" and "investment brands, those whose share of voice is clearly above their share of market." His study indicated that for those brands with small market shares, profit takers are in the minority; however, as the brands increase their market share, nearly three out of five have a proportionately smaller share of voice.

Jones noted that three factors can be cited to explain this change. First, new brands generally receive higher-than-average advertising support. Second, older, more mature brands are often "milked"—that is, when they reach the maturity stage, advertising support is reduced. Third, there's an advertising economy of scale whereby advertising works harder for well-established brands, so a lower expenditure is required. Jones concluded that for larger brands, it may be possible to reduce advertising expenditures and still maintain market share. Smaller brands, on the other hand, have to continue to maintain a large share of voice.

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

James Schroer addressed the advertising budget in a situation where the marketer wishes to increase market share. His analysis suggests that marketers should:

• Segment markets, focusing on those markets where competition is weak and/or underspending instead of on a national advertising effort.

• Determine their competitors' cost positions (how long the competition can continue to spend at the current or increased rate).

• Resist the lure of short-term profits that result from ad budget cuts.

• Consider niching strategies as opposed to long-term wars.

Figure 7-24 shows Schroer's suggestions for spending priorities in various markets.

Economies of Scale in Advertising Some studies have presented evidence that firms and/or brands maintaining a large share of the market have an advantage over smaller competitors and thus can spend less money on advertising and realize a better return.41 Larger advertisers can maintain advertising shares that are smaller than their market shares because they get better advertising rates, have declining average costs of production, and accrue the advantages of advertising several products jointly. In addition, they are likely to enjoy more favorable time and space positions, cooperation of middlepeople, and favorable publicity. These advantages are known as economies of scale.

Reviewing the studies in support of this position and then conducting research over a variety of small package products, Kent Lancaster found that this situation did not hold true and that in fact larger brand share products might actually be at a disadvantage.42 His results indicated that leading brands spend an average of 2.5 percentage points more than their brand share on advertising. More specifically, his study concluded:

1. There is no evidence that larger firms can support their brands with lower relative advertising costs than smaller firms.

2. There is no evidence that the leading brand in a product group enjoys lower advertising costs per sales dollar than do other brands.

3. There is no evidence of a static relationship between advertising costs per dollar of sales and the size of the advertiser.

The results of this and other studies suggest there really are no economies of scale to be accrued from the size of the firm or the market share of the brand.43

Organizational Characteristics In a review of the literature on how allocation decisions are made between advertising and sales promotion, George Low and Jakki Mohr concluded that organizational factors play an important role in determining how communications dollars are spent.44 The authors note that the following factors influence the allocation decision. These factors vary from one organization to another, and each influences the relative amounts assigned to advertising and promotion:

• The organization's structure—centralized versus decentralized, formalization, and complexity.

• Power and politics in the organizational hierarchy.

• The use of expert opinions (for example, consultants).


Cornpetitor's share of voice


Find a defensible niche

Attack with large SOV premium

Increase to defend

Maintain a modest spending premium

Your share of rnarket


Figure 7-24 The share of voice (SOV) effect and ad spending: priorities in individual markets

Figure 7-24 The share of voice (SOV) effect and ad spending: priorities in individual markets

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

• Characteristics of the decision maker (preferences and experience).

• Approval and negotiation channels.

• Pressure on senior managers to arrive at the optimal budget.

One example of how these factors might influence allocations relates to the level of interaction between marketing and other functional departments, such as accounting and operations. The authors note that the relative importance of advertising versus sales promotion might vary from department to department. Accountants, being dollars-and-cents minded, would argue for the sales impact of promotions, while operations would argue against sales promotions because the sudden surges in demand that might result would throw off production schedules. The marketing department might be influenced by the thinking of either of these groups in making its decision.

The use of outside consultants to provide expert opinions might also affect the allocation decision. Trade journals, academic journals, and even books might also be valuable inputs into the decision maker's thinking. In sum, it seems obvious that many factors must be taken into account in the budget allocation decision. Market size and potential, specific objectives sought, and previous company and/or agency policies and preferences all influence this decision.

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