What determines your advertising spend?

Determining how much you are going to spend on your marketing communications can be a difficult process.  It is difficult to quantify precisely the amounts needed to complete all the required tasks.  Communications budgets do not fit neatly into accounting practices.  The diversity of communication’s tools available makes it difficult to allocate spending appropriately.  the budget setting process can be less than clear-cut.

There are four main sets of stakeholder in the setting of communications budgets:

  1. The organisation
  2. Communications (advertising) agencies
  3. Media providers (TV companies, publishers)
  4. Production and fulfilment houses

There can be difficulties in the appropriate allocation of budgets between these parties.  Difficulties can be both political and financial.  For example, is your digital marketing spend the responsibility of your marketing team or is it overly influenced by IT professionals who know the technical detail?

Increasingly, in the modern world, there is audience and media fragmentation.  There are now hundreds of television stations, not the three or four of the 1970s.  This means smaller audiences.  In the 1970s it was not unusual for audiences to be ten to fifteen million.  Now an audience of 5 million is seen as high.

Consumers have changing priorities and increasingly, due to the worldwide web, there is a global perspective in marketing.

Over the decades, several methods of assessing communications and other marketing budgets have been developed.  These are added to traditional unscientific methods used in small businesses.

  1. Marginal Analysis – Which compares promotional expenditure with sales and profit margins.  The aim is to find the point where marginal revenue is equal to marginal costs.  At this point profits are maximised.  At a certain point promotional spend does not cause a further increase in sales,  After this point, profit margins will fall because of promotional saturation.  There are many issues with marginal analysis.  It doesn’t take account of your competitors’ reaction to your promotional expenditure.  It assumes that your products are evenly distributed across your market. It also assumes that communications are the only factor affecting sales.
  2. Arbitrary – This is often known as ‘chairperson’s rules’.  The boss sets the communications budget of gut feeling.  Budget is allocated on a guess.  Budgets are allocated ‘on the hoof’.  No attempt is made to consider need, strategy or environmental changes.  No budgets should be set in this way.
  3. Inertia – Communications budgets are always the same.  There is a failure to respond to market and environmental challenges.  Again, this is not a way to set any budget.
  4. Media Multiplier – This recognises changes in the cost of media charges and inflation.  Budgets are changed to account for increases and decreases in these costs.  Such a strategy assumes that marketing strategy never changes.
  5. Percentage of Sales – Communications budgets are set as a percentage of past sales or expected sales e.g. Communications budget is 5% of turnover. This can be a backward-looking strategy and can make no account of sales potential.  The result can be a limiting of your performance.
  6. Affordable – This is often seen as a sophisticated method relatively free of risk.  Each unit of output is allocated a share of the cost of production and a share value-added activity costs such as packaging.  An allowance is made for profits.  What is left over is spent on communications.  This is often used in companies which are product not customer focused.  If your market fluctuates it can be a vague calculation.  It can also lead to new opportunities being missed.

Quantitative approaches to budget setting include:

  1. Objective and Task (often referred to as Zero Budgeting) – The resources required to achieve each objective are determined.  The costs of each of these resources is aggregated to form an overall budget.  The focus of management is the achievement of goals.  Sophisticated monitoring and feedback mechanisms need to be developed.  What is often missed is a strategic focus.  Objective and task can be good for individual campaigns but bad in terms of overall strategy.  It can also result in regular ‘bun fights’ for budget allocation and cause resentment amongst the staff of different departments.  It can be a disaster for staff morale as resentment between teams can develop.  Often Payout Plans need to be developed where two or three future revenues and costs are estimated to ensure budget expenditure is recouped.  Sensitivity analysis is also used to peg back expenditure because costs are larger than expected or sales develop too slowly.  This leads to objectives being changed mid-stream and strategies altered to reduce the payback period.
  2. Competitor Parity – You spend the same percentage of overall budget on your communications as that of your competitors.  This assumes that everyone in the market is the same and that everybody has the same strategy.  You are not necessarily comparing like with like.  This can lead to a ‘me too’ attitude to marketing and it ignores qualitative aspects of communications.
  3. Advertising to Sales Ratio – where you take account of your market share in your advertising spend.  This assumes a direct correlation between advertising and sales.  It also assumes that you can calculate the overall promotional spend of the market as a whole and of your competitors.  By comparing your communications spend to the market average, you can assess whether you have economies of scale or if your communications are working harder for each pound spent.  A/S ratio can be a valuable indicator as to overall communications spend but not the value of individual campaigns.
  4. Share of Voice – This method is commonly used by marketing professionals.  Basically it is a measure of who shouts loudest in the market.  It measures your share of advertising spend (Adspend) as a percentage of what is spent in your market as a whole.  It is often combined with market share.  Where share of voice and share of market are equal, equilibrium is achieved.  In such circumstances, when communications spending is increased, the market share will increase; and vice-versa.  A useful calculation is to compare your share of market with your competitor’s share of voice:
    1. If both are high, the best strategy is to spend on communications to defend your market position
    2. If your competitor’s share of voice is high, but your share of market is low, it is best to find a niche position, to decrease advertising spend and find other ways to promote your products.
    3. If your competitor’s share of voice is low and your share of market high, you need to hold your position and moderate your advertising spend to maximise income.
    4. Where both are low, there is the opportunity to attack your competitor’s market position through adspend and take advantage of growth opportunities.

Where Share of Voice is greater than Share of Market, investment brands are defined.  These may be new products or products in the growth stage of their lifespan.

Where Share of Voice is less than Market Share, there is opportunity for profit taking.  These may be mature brands and cash cows.

In assessing share of voice, it is important to note:

  1. That new products often require higher communications spending than long-established products.
  2. That smaller brands often have smaller profit margins than larger competitors due to economies of scale and the requirement to have a higher proportion of adspend to sales.
  3. That large brands are often milked for profits and their share of voice is regularly smaller than their market share.

Marketing success is often measured through Share of Voice as opposed to budget size.  It also has to be remembered that a large proportion of communications spend is used to retain a market position rather than to attract new customers.

In determining the appropriate level of communications spend, you need to take account of:

  1. your organisations structure, strategy, direction and values
  2. your available financial resources
  3. the activities of your competitors and wider market conditions
  4. The economic confidence of consumers and retailers
  5. Your required level of product development and your marketing objectives.

The setting of communications budgets needs a strategic approach.