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Ch. 7, Pt. 3, Intro to Advertising
Terms in this set (100)
Two Models of Advertising/Sales Response Function
Concave-Downward Function, S-Shaped Response Function
Concave-Downward Function says that as the amount of advertising increases
Its incremental value decreases.
Logic of the Concave-Downward function is that those with the greatest potential to buy will
Likely act on the first (or earliest) exposures, while those less likely to buy are not likely to change as a result of the advertising.
For those who may be potential buyers, each additional ad, according to the concave-downward function
Will supply little or no new information that will affect their decision, thus the effects of advertising quickly begin to diminish.
Budgeting under the Concave-Downward Function suggests that
Fewer advertising dollars may be needed to create the optimal influence on sales.
S-Shaped Response Curve
Projects an S-shaped response function to the budget outlay, measured in sales.
Outlays of the advertising budget, according to the s-shaped response curve
Have little impact. After a certain budget level has been reached, advertising and promotional efforts begin to have effect as additional increments of expenditures result in increased sales.
The incremental gain, according to S-Shaped Curve
Continues only to a point and then begin to return little or nothing in the way of sales.
The S-Shaped Curve suggests at one extreme a small advertising budget is likely
To have no impact beyond the sales that may have been generated through other means.
The S-Shaped Curve suggests at one extreme that more money does not
Necessarily mean better, as additional dollars spent beyond a certain range have no additional impact on sales and for the most part can be considered wasted.
As with marginal analysis, with the S-Shaped response curve, one would attempt to opperate
At the point on the curve in a certain area where the maximum return for the money is attained.
Sales Response Models (concave-downward function and s-shaped response curve) Problems
The use of sales as a dependent variable, and measurement problems.
Even though marginal analysis and sales response curves may not apply directly, they give managers
Some insight into a theoretical basis of how the budgeting process should work.
A weakness in attempting to use sales as a direct measure to advertising is that various
Situational factors may have effect.
For a product characterized by emotional buying movies, hidden product qualities, and/or a strong basis for differentiation, advertising
Would have a noticeable impact on sales.
The percentage-of-sales method of budgeting has inherent weakness in that
The advertising and sales effects may be reveres, so we cannot be sure whether the situation actually led to the advertising/sales relationship or vice versa.
While advertising and sales should be considered in the budget appropriation descision, they should not
Be the sole determinants of where and when to increase or decrease expenditures.
Many firms employ more than one
Budgeting approaches vary
According to the size and sophistication of the firm.
A budgetary amount is established and then the monies are passed down to the various departments.
The budgets in the top-down are esentially
Predetermined and have not true theoretical basis.
Top-Down methods include the
Affordable Method, Arbitrary Allocation, Percentage of Sales, Competitive Parity, and Return on Investment (ROI)
The firm determines the amount to be spent in various areas such as production and operations, then allocates what's left to advertising and promotion, considering this to be the amount it can afford.
In the affordable method, the task to be performed by the advertising/promotions function is not
Considered, and the likelihood of under- or overspending is high, as no guidelines for measuring the effects of various budgets are established.
The affordable method is common among small and large firms, especially large firms that are
Not marketing-driven and do not understand the role of advertising and promotion.
Often times the affordable method does not allocate
Enough money to get the product off the ground and into the market.
With the affordable method, when the market gets tough and sales and/or profits begin to fall
This method is likely to lead to budget cuts at a time when the budget should be increased.
The budget is determined by management solely on the basis of what is felt to be necessary.
The arbitrary allocation approach has no
Obvious advantages, no systematic thinking has occurred, no objectives have been budgeted for, and the concept and purpose of promotion have been largely ignored.
The only reason why the textbook talks about arbitrary allocation
Is to point out only that it is used-not recommended.
Percentage of Sales Method
The advertising and promotions budget is based on sales of the product.
With the Percentage of Sales Method, management determines the amount by eitehr
Taking a percentage of the sales dollars; or assigning a fixed amount of the unit product cost to promotion and multiplying this amount by the number of units sold.
A variation on the percentage-of-sales method uses a percentage of
Projected future sales as a base. It also uses either a straight percentage of projected sales or a unit cost projection.
In the straight-percentage method of future percentage-of-sales method, sales are
Projected for the coming year based on the marketing manager's estimates. The budget is a percentage of these sales, often an industry standard percentage.
One advantage of using future sales a a base is that the budget
Is not based on last year's sales.
As the market changes, management must factor the effect of the changes on sales into
Next year's forecast rather than relying on past data, with the future percentage of sales method
Percentage-of-Sales is financially safe and keeps ad spending within reasonable limits, as it
Bases spending on the past year's sales or what the firm expects to sell in the upcoming year.
With percentage-of-sales there will be suficient monies to cover this budget, with increases in
Sales leading to budget increases and sales decreases resulting in advertising decreases.
The percentage-of-sales method is simple with the calculations
Used to arrive at a budget not difficult.
The percentage-of-sales method of budgeting is generally stable. While the budget
May vary with increases and decreases in sales, as long as these changes are not drastic the manager will have a reasonable idea of the parameters of the budget.
Disadvantages of percentage-of-sales method include letting the level of sales determine the amount of advertising and promotions dollars to be spent reverses
The cause-and-effect relationship between advertising and sales.
Percentage-of-sales method treats advertising as an expense associated with
Making a sale rather than an investment.
Percentage of sales is not stable.
The method does not allow for changes in strategy either internally or from competitors.
An aggressive firm may wish to allocate more monies
To the advertising and promotions budget, a strategy that is not possible with a percentage-of-sales method unless the manager is willing to deviate from industry standards.
Percentage-of-sales method of budgeting may result in severe misappropriation of funds
If products with low sales have smaller budgets, this will hinder progress, and very successful products may have their monies better spent elsewhere.
Percentage-of-sales method is difficult to employ for new product introductions.
If no sales histories are available, there is no basis for establishing the budget.
With percentage-of-sales method, projections of future sales may be difficult, particularly if
The product is highly innovative and/or has fluctuating sales patterns.
If the budget is contingent on sales, as in percentage-of-sales, decreases in sales will lead to
Decreases in budgets when they most need to be increased.
Continuing to cut the advertising and promotion budgets with percentage-of-sales may just add impetus to
The downward sales trend.
Companies that maintain or increase their ad expenditures during recessions
Achieve increased visibility and higher growth in both sales and market share (compared to those that reduce advertising outlays.
Percentage-of-Future-Sales may have problems with
Forecasting, cyclical growth, and uncontrollable factors
Sources for Competitors' Expenditures
Companies that provide competitive advertising information, trade associations, and other advertising industry periodicals.
Clips competitors' ads from local print media, allowing the company to work backward to determine the cumulative costs of the ads placed.
Competitive Parity Method
Managers establish budget amounts by matching the competition's percentage-of-sales expenditures.
The argument for competitive parity method is that setting budgets in this fashion
Takes advantage of the collective wisdom of the industry.
Competitive parity method takes the competition into consideration which leads to
Stability in the marketplace by minimizing marketing warfare, according to supporters.
Competitive parity ignores the fact that advertising and promotions are
Designed to accomplish specific objectives by addressing certain problems and opportunities.
The competitive parity method assumes that because firms have
Similar expenditures, their programs will be equally effective, ignoring contributions of creative executions and/or media allocation, as well as the success/failure of various promotions.
Competitive parity ignores possible advantages of the firm itself as some companies
Simply make better products than others.
A competitive parity strategy must consider the fact that a competitor's advertising can actually benefit
One's own firm, and that one competitor's gain is not always the other's loss.
Since competitive parity figures are determined by examination of competitors' previous years' promotional expenditures, changes in
Market emphasis and/or spending may not be recognized until the competition has already established an advantage.
There is no guarantee that a competitor will not increase or decrease its own
Expenditures, regardless of what other companies do.
Few firms employ the competitive parity method as a sole means of establishing the promotional budget, as this method
Is typically used in conjunction with percentage-of-sales or other methods.
It is never wise to ignore the competition, but managers should not just
Emulate them in setting goals and developing strategies with a competitive parity method on its own.
In the percentage-of-sales method, sales
Dictate the level of advertising appropriations.
Causes sales, making the percentage-of-sales method difficult.
In the marginal analysis and S-shaped curve approaches, incremental
Investments in advertising and promotions lead to increases in sales.
ROI Budgeting Method
Advertising and promotions are considered investments, like plant and equipment, thus the budgetary appropriation leads to certain retuns.
Like other aspects of the firm's efforts, advertising and promotion
Are expected to earn a certain return with the ROI Budgeting Method
ROI Budgeting Method looks good on paper, but 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.
While managers are certain to ask how much return they are getting for advertising and promotion expenditures, the question remains
Unanswered, even with ROI Budgeting Method, and depends on the criteria used to determine effectiveness.
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 than the top-down methods would be to consider
The firm's communications objectives and budget and what is deemed necessary to attain these goals.
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 of the promotional planning model is to budget so that
Promotional-mix strategies can be implemented to achieve the stated objectives.
It is difficult to establish a budget without specific objectives in mind, and
Setting objectives without regard to how much money is available makes no sense.
The Objective and Task Method of budget setting uses a Buildup Approach consisting of three steps
Defining the communications objectives to be accomplished, determining the specific strategies and tasks needed to attain them, and estimating the costs associated with performance of these strategies and tasks.
The manager must monitor the objective and task method process throughout and
Change strategies depending on how well objectives are attained.
Monitoring the Objective and Task Method involves several steps
Isolate Objectives, Determine Tasks Required, Estimate Required Expenditures, Monitor, Reevaluate Objectives.
Isolate Objectives (Monitoring the Objective and Task Method)
When the promotional planning model is presented, a company will have two sets of objectives to accomplish-the marketing objectives for the product, and the communications objectives
After the marketing objectives are established, the task (objective and task method) involves
Determining what specific communications objectives will be designed to accomplish these goals.
Determine Tasks Required (Monitoring the Objective and Task Method)
May include advertising in various media, sales promotions, and or other elements of the promotional mix, each with its own role to perform.
Estimate Required Expenditures (Monitoring the Objective and Task Method)
Buildup analysis requires determining the estimated costs associated with the tasks developed in the previous step (determine tasks required)
Monitor (Monitoring the Objective and Task Method)
There are ways to determine how well one is attaining established objectives.
Performance should be monitored and evaluated
In light of the budget approved in the objective and task method.
Reevaluate Objectives (Monitoring the Objective and Task Method)
Once specific objectives have been attained, monies may be better spent on new goals.
If one has achieved the level of consumer awareness sought, the budget should be
Altered to stress a higher-order objective such as evaluation or trial.
The major advantage of the objective and task method is that
The budget is driven by the objectives to be attained.
The managers closest to the marketing effort will have specific strategies and input
Into the budget-setting process with the objective and task method.
Major disadvantage of the objective and task method is
The difficulty of determining which tasks will be required and the costs associated with each.
It is not always possible to know exactly what is required and/or how much it wll cost
To complete the job.
The objective and task method process is easier if there is
Past experience to use as a guide, with either the existing product or a similar one in the same product category.
The objective and task method is especially difficult for new product introductions, as a result
Budget setting using this method is not as easy to perform or as stable as some of the other budgetary methods.
The objective and task method offers advantages over other methods
Of determining a budget, but is more difficult to implement when there is not track record of the product.
The first months of a new product's introduction typically require
Heavier-than-normal advertising and promotion appropriations to stimulate higher levels of awareness and subsequent trial.
A new product entry should be spending
At approximately twice teh desired market share.
To determine how much to spend on a new product, marketers often develop a
Determines the investment value of the advertising and promotion appropriation.
The basic idea of a payout plan is to project the revenues the product will generate, as well as
The costs it will incur over 2 or 32 years.
Based on an expected rate of return, the payout plan will assist in determining
How much advertising and promotions expenditure will be necessary and when the return might be expected.
THIS SET IS OFTEN IN FOLDERS WITH...
Ch. 7, Pt. 2, Intro to Advertising
Ch. 13/14, Pt. 3/1, Intro to Marketing
Ch 14/7, Pt. 2/1, Intro to Advertising
Ch. 13, Pt. 2, Intro to Advertising
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