L

Advertising expenditures

Range A RangeB RangeC Advertising expenditures

(for example, word of mouth). At the other extreme, more does not necessarily mean better: Additional dollars spent beyond range B have no additional impact on sales and for the most part can be considered wasted. As with marginal analysis, one would attempt to operate at that point on the curve in area B where the maximum return for the money is attained.

Weaknesses in these sales response models render them of limited use to practitioners for direct applications. Many of the problems seen earlier—the use of sales as a dependent variable, measurement problems, and so on—limit the usefulness of these models. At the same time, keep in mind the purpose of discussing such models. Even though marginal analysis and the sales response curves may not apply directly, they give managers some insight into a theoretical basis of how the budgeting process should work. Some empirical evidence indicates the models may have validity. One study, based on industry experience, has provided support for the S-shaped response curve; the results indicate that a minimum amount of advertising dollars must be spent before there is a noticeable effect on sales.31

The studies discussed in earlier chapters on learning and the hierarchy of effects also demonstrate the importance of repetition on gaining awareness and on subsequent higher-order objectives such as adoption. Thus, while these models may not provide a tool for setting the advertising and promotional budget directly, we can use them to guide our appropriations strategy from a theoretical basis. As you will see later in this chapter, such a theoretical basis has advantages over many of the methods currently being used for budget setting and allocation.

Additional Factors in Budget Setting While the theoretical bases just discussed should be considered in establishing the budget appropriation, a number of other issues must also be considered. A weakness in attempting to use sales as a direct measure of response to advertising is that various situational factors may have an effect. In one comprehensive study, 20 variables were shown to affect the advertising/sales ratio. Figure 7-11 lists these factors and their relationships.32 For a product characterized by emotional buying motives, hidden product qualities, and/or a strong basis for differentiation, advertising would have a noticeable impact on sales (see Exhibit 7-11). Products characterized as large-dollar purchases and those in the maturity or decline stages of the product would be less likely to benefit. The study showed that other factors involving the market, customer, costs, and strategies employed have different effects.

The results of this study are interesting but limited, since they relate primarily to the percentage of sales dollars allocated to advertising and the factors influencing these ratios. As we will see later in this chapter,

Exhibit 7-11 A strong basis for differentiation could show a noticeable effect of advertising on sales

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