You are on page 1of 26

# Budget Decisions

Budget Decisions
Establishing

the budget
Budgeting approaches
Allocating the budget

## Establishing the budget

Marginal

Analysis
Sales response models

Functions
B. S-Shaped
Response
Function

Sales

High Spending
Little Effect

Middle Level
High Effect

Initial Spending
Little Effect

Sales

A. ConcaveDownward
Response Curve

## Range A Range B Range C

Budgeting Approaches
Top-down

budgeting
Bottom-up budgeting

Top-Down Budgeting
Top Management Sets the
Spending Limit

## The Promotion Budget Is Set to

Stay Within the Spending Limit

Top-Down Budgeting
Arbitrary

allocation
The affordable method
Historical Method
Percentage of Sales
Competitive parity
Return on investment (ROI)

Affordable
Affordable
Method
Method

Return
Return on
on
Investment
Investment

Top
Top
Management
Management

Competitive
Competitive
Parity
Parity

Arbitrary
Arbitrary
Allocation
Allocation

Percentage
Percentage
of
of Sales
Sales

It

## is used when a company allocates

whatever is left over to advertising.
It is common among small firms and certain
non-marketing-driven large firms.
Companies using this approach dont value
Logic: we cant be hurt with this method.
Weakness: it often does not allocate enough
money.

Historical Method
Historical

## information is the source for this

common budgeting method.
The inflation rate and other marketplace
amount.
This method, though easy to calculate, has
little to do with reaching advertising
objectives.

Percentage-of-Sales Method
It

## compares the total sales with the total

advertising budget during the previous year
or the average of several years to compute a
percentage.
Two steps

## Step 1: past advertising dollars/past sales = % of

sales.
Step 2: % of sales X next years sales forecast =

Percentage-of-Sales Method
Based

## on (future or past) sales dollar or unit

product cost
Method 1: Straight Percentage of Sales
2007

## Total dollar sales

Straight % of sales at 10%

2008

\$1,000,000
\$100,000
\$100,000

2007

2008

## Forecasted sales, 100,000 units

2008

\$4
\$1
\$100,000

Percentage-of-Sales Method
Pros

Financially safe
Reasonable limits
Stable

Percentage-of-Sales Method
Cons

## Reverse the cause-and-effect relationship

Stable?
Misallocation
Difficult to employ for new product introductions.

Competitive-Parity Method

## This method uses competitors budgets as

benchmarks and relates the amount invested in
advertising to the products share of market.
Logic: share of media voice share of consumer
mind share of market.
Share of media voice: the advertisers media
presence.
The actual relationship above depends to a great
extent on factors such as the creativity of the
message and the amount of clutter in the
marketplace.

Outlays Do Not Always Hurt

Competitive-Parity Method
Pros

## Take advantage of the collective wisdom of the

industry
Spending what competitors spend helps prevent
promotion wars.

Cons

## Companies differ greatly.

There is no evidence that budgets based on
competitive parity prevent promotion wars.
(Prisoners Dilemma)

Bottom Up
method
Pay out Planning

Isolate
Isolate objectives
objectives
Determine
required
Estimate
Estimate required
required expenditures
expenditures
Monitor
Monitor
Reevaluate
Reevaluate objectives
objectives

Payout Planning

Quantitative Models

Budget

## Market Size and potential

Market share goals

High
Low

Competitors
Share of Voice

## Schroers Suggestions for Ad spending

Priorities in different market
Decreasefind
Decreasefind aa
defensible
defensible niche
niche

Increase
Increase to
to defend
defend

Attack
Attack with
with large
large
SOV

Maintain
Maintain modest
modest
spending

Low

High

Organizational Characteristics

## Factors that influence advertising and

promotion budgets
The organizations structure
Power and politics
The use of expert opinions
Characteristics of the decision maker
Approval and negotiation channels
Pressure on senior managers to arrive
at the optimal budget