Learning Objectives

After studying this section, student should be able to do the following:

Recognize the two primary top-down budgeting methods. Identify the pros and also cons that the top-down budgeting methods. Recognize the two major bottom-up budgeting methods. Discuss budget plan allocation and the prestige of timing in budgeting.

Budget decision are impacted by problems both internal and external to the client. One crucial external affect is the all at once economic condition of the country and how this affects the client’s industry. Also the most inspired declaring may no motivate consumer to open up their wallets in troubled times prefer now. We view this instance now quite clearly, for example, in the automotive industry, together the stock market and credit dilemmas have make money scarce, and also consumers are pressed to pay higher prices for gasoline, house heating, groceries, and other necessities. It’s no surprising, then, that automotive declaring spending in the United says dropped to $1.99 billion in the first quarter that 2008. The sounds choose a lot of money (and the is!)—but the down an ext than 14 percent compared with the exact same time a year before. As one market executive observed, ad spending is “sinking as quick as new car sales.” when times are tough, nothing is sacred: even Tiger Woods’ nine-year relationship as a fixture in basic Motors’ advertising gained the axe as the industry tries to cut its costs.Quoted in “Auto ad Spending Down, other than Digital,” eMarketer, July 23, 2008, http://www.emarketer.com/Article.aspx?id=1006426&src=article1_newsltr (accessed July 23, 2008); rich Thomaselli, “GM ending Tiger Woods proof Deal,” Advertising Age, November 24, 2008, http://adage.com/article?article_id=132810 (accessed November 28, 2008); http://adage.com/article?article_id=46288& search_phrase=shona%20seifert.

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Top-Down Budgeting

In top-down budgetingMethod in which top management sets the quantity the agency will spend on promotional tasks for the year; the is allocated among all of the this firm advertising, PR, and other advancement programs., top monitoring sets the all at once amount the company will spend on promotional tasks for the year. This full amount is climate allocated among every one of the advertising, PR, and also other advancement programs. How does top management arrive in ~ the yearly promotional budget? Typically, they usage a percentage-of-sales method, in which the budget is based on the amount the firm spent on declaring in the ahead year and also the sales in that year.


Percentage-of-Sales Method

The percentage-of-salesBudgeting technique that divides the proportion of the this firm past yearly promotional budget by past sales to come at the percent of sales; this is used to intended sales in the coming year to arrive at the advertisement budget for the year. Method is the proportion of the this firm past annual promotional spending plan divided by past sales to arrive at the percentage of sales. That percent of sales is then used to the intended sales in the comes year to come at the budget for the year. Because that example, if the firm spent $20 million on declaring last year and also had $100 million in sales, the portion of sales would certainly be 20 percent. If the agency expects to achieve $120 million in sales the adhering to year, then 20 percent that $120 million is $24 million, which would certainly be the budget for declaring that year.


Figure 7.2 Percentage-of-Sales Method

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Wall Street analysts sometimes look at at transforms in the ad-to-sales ratioThe relationship between a this firm promotional budget and its sales; this proportion is essential to business experts in assessing a this firm health. Together a authorize of the wellness of a company. Because that example, Procter & Gamble’s ad-to-sales-ratio slipped from 10.7 percent in 2004 come 9.9 percent in 2006. Those decreases came together P&G challenged growing margin push from increasing commodity costs. Some analysts see solid ad spending as an investment in growth or a sign that a company is having actually no trouble meeting its income targets, therefore they want to watch an ad-to-sales ratio that is regular or increasing.Jack Neff, “P&G Rewrites its definition of ‘Ad Spend,’” Advertising Age, September 3, 2007, 3.


Industry Averages Method

Some service providers use sector averagesA technique for evaluating ad-to-sales ratios based upon the ratios viewed in a group of providers in a given industry. (published by trade associations) as a overview to collection their promotional budget. Ad-to-sales ratios differ widely relying on the industry. For example, health services companies had one that the highest possible ad-to-sales ratios for 2006, in ~ 18.7 percent. Other markets with high ad-to-sales ratios are transportation solutions (14.2 percent), activity pictures and videotape productions (13.7 percent), food (11.9 percent), newspapers (11.1 percent), and also broadcast television stations (10.7 percent). In contrast, computer and office tools had an ad-to-sales proportion of 1.2 percent, when computers and also software wholesale had actually only a 0.2 percent ad-to-sales ratio.Kate Maddox, “Ad Spending up in ’05, ’06,” B to B, august 8, 2005, 17.

Sometimes a dramatic increase in advertisement spending by one contender in an sector spurs rather to follow suit. For example, in 2007 German insurance large Allianz an ext than quadrupled that annual global advertising spending plan to 225 million euros after contender Zurich gaue won Services launched a large-scale global awareness campaign.“Allianz to plan €225m an international Branding Blitz,” Marketing Week, may 3, 2007, http://goliath.ecnext.com/coms2/gi_0199-6503373/Allianz-plans-225m-global-branding.html (accessed February 1, 2009). Similarly, the auto insurance industry saw overall advertisement spending jump much more than 32 percent in just two years when GEICO increased its ad spending 75 percent in 2004; this spurred rivals to increase their advertisement budgets as well. Steady Insurance invested $265 million in 2006, up from $201 million in 2004, and also State Farm likewise plans to boost spending, which topped $270 million in measure up media in 2006.Mya Frazier, “Geico’s $500M Outlay pays Off,” Advertising Age, July 9, 2007, 8.

Spending on specific segments of the promotion budget, such together on coupons, is very much propelled by contender spending levels. Customer packaged products companies favor P&G and also Unilever claim not to prefer couponing schemes together a promotion activity. Indeed, P&G looked into eliminating coupons in 1997 due to decreasing newspaper circulation and also usage. But companies space tied to using coupon promotions. If one company alone decides to give up couponing, they challenge losing cost-conscious consumer to the competition. If companies shot to work-related together to scale back on couponing, they might be accused the violating antitrust regulations. Together a result, security on the media side of couponing to be up 26 percent in 2006, reaching $1.8 billion, even though customer use of coupons was under 13 percent throughout the very same time period.Jack Neff, “Package-Goods Players just Can’t stop Coupons,” Advertising Age, may 14, 2007, 8.


Pros and Cons the Top-Down Methods

The advantages of top-down philosophies are your speed and straightforwardness. The disadvantage is the the approaches look come the previous as a guide, rather than come future goals. Just because a company spent $40 million on advertising the vault year doesn’t average that figure is appropriate for following year. Also, budgets tied to sales numbers mean the a this firm promotional spending plan will diminish if sales decrease—but in reality increasing the promotional spending plan may be precisely what is essential in order come remedy decreasing sales.


Bottom-Up Techniques

Alternatively, part companies start the budgeting procedure each year v a clean slate. They use bottom-up budgetingMethod in which a agency begins the advancement budgeting procedure each year with a clean slate, identify promotional goals and also allocating enough money to attain those goals. Techniques, in i beg your pardon they very first identify promotional objectives (regardless of previous performance) and allocate enough money to accomplish those goals.


Objective-Task Method

The objective-task methodThe most common an approach of bottom-up budgeting, in i beg your pardon a company sets the objective or job they desire the promotion to achieve, then approximates the budget needed to achieve it; top management reviews and also approves the spending plan recommendation. Is the most common an approach of bottom-up budgeting. Service providers that use this method first set the objective or task they desire the promo to achieve. Next, they estimate the budget they will require to attain that objective or task. Finally, top management reviews and also approves the budget recommendation.

For example, champagne machine Moët & Chandon set its target “to thrive the totality market” in the unified States.Jeremy Mullman, “Moët, Rivals Pour much more Ad Bucks into Bubbly: Champagne Makers try to develop Year-Round Demand,” Advertising Age, September 3, 2007, 4. That is, Moët will use declaring to increase intake of champagne transparent the year, not simply over the holidays. Moët based its target on research that contrasted champagne usage in the United claims to the in other countries. “The average U.S consumer drinks half a glass of champagne a year, the typical British consumer drinks fifty percent a bottle and the median French customer drinks three bottles. There’s clearly room because that growth,” claimed Stuart Foster, manager of business development at Moët-Hennessy USA.Jeremy Mullman, “Moët, Rivals Pour an ext Ad Bucks into Bubbly: Champagne Makers try to produce Year-Round Demand,” Advertising Age, September 3, 2007, 4. Moët an ext than tripled the U.S. Advertisement spending in 2006 to $9.5 million indigenous $2.8 million. Mirroring the objective, the firm ran its declaring in the summer rather than just roughly the holidays.

Similarly, Danone Waters is increasing its ad spending in the united kingdom in 2008 in an effort to rise bottled water consumption amongst British consumers. Danone Waters is enhancing its spending by 15 percent, contrasted to Moët’s tripling of ad expenditures, which mirrors that there is no hard-and-fast rule around how much budget plan is necessary to reach a offered objective.Jeremy Mullman, “Moët, Rivals Pour much more Ad Bucks into Bubbly: Champagne Makers try to create Year-Round Demand,” Advertising Age, September 3, 2007, 4; “Danone Waters plan to boost Spend by 15%,” Marketing, July 25, 2007, 4.

Other objectives advertisers can set include acquiring new customers, retaining existing customers, or building the brand. The objective to acquire new customers often requires a bigger budget than the advertising the firm needs to maintain existing customers.


Stage-Based Spending

Some suppliers use the product life cycle methodStage-based budgeting technique that allocates much more money during the arrival stage of a brand-new product 보다 in later on stages when the product is established., in which lock allocate an ext money throughout the advent stage that a new product than in later stages as soon as the product is established. Because that example, Procter & gambling allocated $15 million to heralding Dawn simple Pleasures, a new liquid laundry detergent product the comes through a separate air freshener attached to the basic of the bottle. The allocated much less money ($10–12 million) because that Dawn straight Foam, a product it introduced two years prior.Vanessa L. Facenda, “Procter Dishes out 3-Tiered Dawn Attack,” Brandweek, September 24, 2007, 4. The must spend greatly to promote new products is especially strong for pharmaceutical companies when they introduce new drugs. Medicine companies need to get physicians to talk about their drugs and also prescribe them.

In contrast, companies such as baby food manufacturers must invest in solid promotion ~ above a continual basis, since they acquire a brand-new set of client every year. “We provide solid consumer promo support to journey trial, an especially in our infant segments, whereby we have actually a new group of consumer entering the sector each year,” stated Randy Sloan, executive vice president and also general manager at Del Pharmaceuticals, i beg your pardon is the number one advertiser in teething pain relief, children toothpaste, and also adult oral pain products.Quoted in “A Targeted approach Creates a Powerhouse,” Chain medicine Review, June 4, 2007, 34.


SS+K Spotlight

Since msnbc.com’s budget year runs from July come June, Catherine Captain and all various other department heads must start submitting their budget plan requests in march so the the board have the right to determine your budgets prior to the next fiscal year starts. They use a bottom-up strategy based upon objectives, however sales are likewise a crucial part of determining what the final spend will be.


Video Spotlight

Catherine Captain

(click to view video)

Catherine Captain talks about the relativity of budget plan sizes.


Budget Allocation and Timing

In enhancement to deciding exactly how much come spend, companies need to understand when they will certainly be security the money.


Figure 7.3 msnbc.com spending plan Allocation

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For part companies, the time is smooth. Together we saw through the Moët champagne example, the agency will invest its budget plan throughout the year. Plenty of other businesses action up their heralding in the mainly leading up to the Christmas holiday season. Others, such together beach apparel equipments or home innovation companies whose work-related is excellent in warmth weather, might concentrate your spending throughout a certain time of year.

Keep in mind that the budget plan needs to salary for more than just creating the ads and also buying the media to run them. Consider a beachwear campaign for one apparel device as one example. Although many of the campaign budget plan is invested in the 2nd quarter top top media buys to hit consumers through swimsuit ads together they gear up because that summer, the ad agency needs to allocate several of the money to laying the groundwork for this campaign. It will should spend some money in the earlier part of the year to pay for sector research, ad development, and testing. After the ads run, the last of the budget might go to assess the campaign’s effectiveness.

Other factors that add to budgeting:

Media costs: for retailers, the vacation season is a renowned time, so choose all points supply and also demand, media costs tend to walk up throughout that time. Production costs: an incredible number of components add to do an ad, whether it’s TV, web banner, or print, and also the expense can vary widely, which is crucial to take into consideration when you develop a bottom-up budget.

SS+K Spotlight

While a bump sum budget plan had been approved for SS+K to spend, Catherine Captain and also msnbc.com had to be responsive come their interior revenue situations. In other words, if they weren’t hitting other heralding sales objectives, they were no going come be ready to traction the create on the disbursement of countless dollars.


Figure 7.4 Budget photo of the Elements and Timing because that the msnbc.com Campaign

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SS+K outlined each aspect of the production and when the agency would have to have the client’s money fully committed and accessible to spend. Part of the account monitoring team’s duty is to control the schedule by which everyone gets paid because that her part in a production.


Video Spotlight

Catherine Captain

(click to view video)

Catherine Captain defines the prominence of the very first marketing budget and what would happen if that didn’t go well.

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Key Takeaway

Clients usage a variety of methods to determine their declaring budgets. One basic distinction is in between top-down and bottom-up methods. Top-down ideologies are easier; castle basically use last year’s expenditures together a starting point. However, they also are an ext simplistic and may be self-defeating because they wind up allocating much more money to promote products that space doing well at the price of products that are doing poorly—when simply the the contrary adjustment might make more sense. Bottom-up viewpoints start by clues the particular objectives a firm has actually for a brand and then estimating just how much the will price to meet those objectives. Budget-setting is more facility than just tallying increase what it costs to make and place advertising; the customer also has to take into consideration the sources an agency will need to conduct research, develop an heralding strategy, and also measure just how well the strategy functioned so it deserve to tweak the approach in the future if necessary.


Exercises

Compare and contrast top-down budgeting v bottom-up budgeting. Describe when advertisers need to use the portion of sales and industry averages approaches for budgeting. Describe when advertisers must use the objective-and-task and stage-based spending approaches for budgeting. Describe and explain the components that contribute to proper budget allocation and also timing.