Methods for determining the company's advertising budget. Formation of the advertising budget Advertising budget required to achieve market share

determine the main factors on which the advertising budget depends;
choose the method of formation advertising budget;
determine the types of advertising;
evaluate cost effectiveness and, if necessary, reallocate costs.

Step 1. Determine the main factors on which the advertising budget depends

The goal you want to reach

Often the goal marketing campaign is formulated very vaguely: “To be known about us ...” The task can be specified (made quantitatively measurable) by answering the following questions:

Who should know? Determine the target audience for products and advertising. The target audience of products is the direct consumers of the product, the target audience of advertising is those who make the decision to purchase or significantly influence the adoption of this decision. The more detailed description target audience you have, the better. If you don't have data, do your research and find out who your consumer is. Namely: where, when, how often, under what circumstances, with whom and with what emotions the consumer buys and uses your products.
What exactly do consumers need to know? The object of advertising is established (products, services, novelties, company image, terms of cooperation, special offer and etc.).
What will it give you and in what time period? It is specified during what time the task will be solved, how it is related to sales volumes and profit.

For budget planning, all goals must be quantifiable, otherwise it is impossible to evaluate achievements or allocate resources. Usually slogans are formulated: “we will advertise”, “we will hold an action”. Instead, plan to achieve specific goals, such as acquiring 1,000 new customers through ads in the trade press.

A new product or service requires more intensive advertising. The cost of bringing a new company's product or service into a highly competitive market often eats away at the first year's gross profit. Promotion of a company, its products and services always requires large start-up expenses (see table 1).

Table 1. How Marketing Spending Varies with Objectives

Indicators	Implementation	Growth	Maturity	recession
Marketing Goals	1. Attracting the attention of buyers to a new product or service. 2. Formation of the image of a new product or service.	1. Sales expansion. 2. Expansion of assortment groups. 3. Formation of commitment to the company.	1. Maintaining the distinctive benefits of a product or service. 2. Standing up for market share. 3. Finding new niches, new ways of consuming goods or services.	1. Prevention of falling demand. 2. Recovery of sales volume. 3. Maintain sales profitability.
Volume of sales	Growth	Fast growth	Stability, slowing growth	Reduction
Competition	None or little	Moderate	strong	Minor
Profit	negative	Increasing	Shrinking	Rapidly declining, no profits, losses
Marketing costs	Extremely tall, growing	high, stable	Shrinking	Low
Coefficient	1,6	1,2	0,8	0,4

Step 2. Choosing a budgeting method

Methods for determining the marketing budget are shown in Table 2. The most common method is to determine the budget as a percentage of the expected (or achieved) sales volume or profit. This method is quite simple and at the same time accurately reflects the main goal of tactical marketing - increasing sales. Also very popular methods of planning "according to the residual principle" and in comparison with the costs of the leader or the nearest competitor. All these methods of determining marketing costs are logical and consistent, but they are best used in combination.

Method	Description
According to the residual	When planning, they proceed from the amount remaining after the distribution of funds to higher priority areas
Parity with competitors	The approximate amount of marketing costs of a competitor is taken as a basis.
By goals	Depending on the goals and objectives of the company in the field of marketing
From sales	The budget is defined as a percentage of existing or planned sales volumes
From the achieved level	Increase or decrease in costs depending on the results of the past period

IN developed countries The share of marketing costs is about 25 percent in the cost of traditional goods and up to 70 percent in new products. Considering profitability, the base share of traditional product marketing costs is in the range of 10-15 percent of sales revenue. In Russia, the share of marketing costs ranges from 1 to 5 percent, that is, on average, 3 percent of revenue.

Example: a company plans to launch Russian market new brand and intends to take 15 percent of the market. The market size of the company's analysts is estimated at 2 billion US dollars

Target sales volume = market size x target market share:

$2,000 million x 0.15 = $300 million.

percentage of marketing spend = average percentage of the marketing budget in Russia (3 percent) x adjustment factor depending on the goal (1.6 - "implementation").

Thus, the required percentage of marketing spend = 3% x 1.6 = 4.8%.

Total Marketing Spend = Percentage of Marketing Spend x Target Sales: 300 x 0.048 = $14.4 million.

IN Russian companies As a rule, a “compromise” approach to the formation of an advertising budget is used. Its essence is the preparation of two budgets - the desired and the actual. Desired is the budget that you would like to have in order to achieve the maximum coverage of the target audience. Valid - what you can realistically spend on advertising based on the calculation of the payback period of the product. By comparing these two budgets, an acceptable (compromise) option for the company is developed.

Step 3. Decide on the types of advertising

The distribution of the marketing budget by main cost items depends on the industry in which your company operates, on the solution strategy marketing tasks and type of market. Experts recommend an integrated approach, when the impact on the consumer occurs through several channels at the same time. Ask yourself: Where is my ad most likely to be seen by the target audience? This is often where the delivery of your message to the consumer fails.

Step 4: Evaluate cost effectiveness

Final indicator marketing activities is the company's turnover or sales revenue. But, for example, at the initial stages of bringing a product to the market, it is more important to achieve a certain awareness of consumers and form a favorable image of a product or service. Therefore, at each individual stage, to assess the effectiveness of marketing costs, it is advisable to use different indicators, depending on the previously formulated (quantified) goals. The goal itself should serve as the main indicator of effectiveness: if you reached the goal, it means that you effectively planned the costs and implemented the plan, if you didn’t achieve it, adjustments are needed.

The famous phrase of the American entrepreneur of the beginning of the last century, John Wanamaker, that he knows that he spends half of his money on advertising wasted, but does not know which half, has not lost its relevance in our days. Almost all companies face the problem definitions optimal advertising budget and practically no one can determine this magic number - budget, which would allow you to get a 100% return on advertising. Any deviation from optimality leads to inefficiency: with less company budget receives less profit from sales (since not all consumers are aware of the product), with more company budget simply throws away part of the funds to the wind (since all consumers are aware and additional advertising not required). However, the first situation, when due to insufficient level advertising company may suffer significant losses, is more serious than the second - when company spending money on advertising. In favor of a higher level of spending is also the fact that the goal advertising is not only informing consumers, but also reminding and persuading. However, in this case, the main question is about the optimal level budget- remains open. Many professionals in the calculation advertising budget rely on their own experience, common sense and simple interdependencies. Recently, more sophisticated calculation methods have appeared. advertising budget, but their evaluation and application should not be divorced from practice. The following describes methods determination of advertising costs on the basis of established practice and several theoretical methods that deserve the attention of all those involved in solving this difficult task.

Fixed budget method

The company sets a certain level of advertising expenses, and these expenses remain constant from year to year despite any changes in the internal and external environment companies.

Residual method

Fortunately, the two methods described above for determining the advertising budget are not often encountered due to their obvious inefficiency and inability to reflect the changes that are constantly taking place both in the internal and external environment of the company. According to Krueger, such methods are typical for small companies whose management "does not believe" in advertising.

Define a budget based on a certain percentage of sales

Defining the budget as a certain percentage of sales is a more advanced method. Typically, the advertising budget is between 1.5% and 3% of total sales for industrial products and between 15% and 30% of total sales for consumer products. The company can set a certain percentage of both last year's sales and next year's sales forecast. In the latter case, the accuracy of the forecast is important. Advertising/total sales is a numeric expression of the ratio of two variables (because both total sales and the percentage a company sets can change). Keeping the same percentage constant assumes that the company has found the optimal ratio between the sum of advertising costs and total sales, according to the company.

One of the options this method- Establishment of advertising expenses for one commodity unit. This is a common practice used by manufacturers of cars, beer and cigarettes. In this case, advertising/total sales is expressed in dollars per car, TV, unit, and so on. When calculated on the basis of the number of units produced, the advertising budget can be adjusted more quickly depending on sales and production fluctuations.

Determination of the budget based on a certain percentage of sales taken from competitors

The company evaluates in monetary terms the advertising activity of competitors and their total sales. Then the percentage of sales that competitors send to advertising is calculated. As a result, in the final determination of its advertising budget, the company focuses on this percentage (using its own sales volume).

Some areas of business have developed their own specific indicators of advertising costs in relation to sales. And although there are no guarantees that these indicators are optimal here either, many companies try to stick to them for strategic reasons - to keep up with competitors.

Despite the fact that these two methods described above are far from perfect, they are used to calculate advertising costs in most companies. The problem of determining the advertising budget here is solved on the basis of accepted practice, own experience and general logical assumptions. It should be noted that when calculating advertising budgets in this way, it is necessary to provide for a reserve fund that can be used to “pay off” unaccounted for changes in the external environment of the company. For example, due to the growth in the cost of advertising media in recent years, advertisers have to dramatically increase their advertising budgets just to keep the amount of purchased space and time at the same level (that is, to achieve the planned level of advertising).

When determining the advertising budget, the company evaluates the share commodity market, which it occupies, estimates the total size of the advertising market, and then calculates the budget required to cover the same percentage of the advertising market that the company occupies in the product market. Simply put, if the company's share in the product market is 15%, then its advertising should occupy the same 15% of the advertising market (advertising market in this situation refers to advertising of the same type of goods placed by the company and all its competitors).

This method is based on the assumption of a linear relationship between advertising spending and the company's product market share (see Figure 1).

To link their own advertising costs, competitors' advertising costs and total sales in a single indicator, they use the value of advertising costs per unit market share. Obviously, an aggressive competitor will try to spend a little more money on advertising in order to increase its market share. If, for example, a company plans to increase its market share by 5%, and the generally accepted cost per 1% share is $500,000 on average, the company's advertising budget would need to increase by $2.5 million. Due to the fact that the total volume of the advertising market varies depending on the size of the advertising budgets of competing companies and the number of competitors, the budget determined by this method needs to be constantly adjusted. As the total advertising market increases, the company must increase its budget in order to maintain its planned share. A decrease in the total volume of the advertising market automatically leads to an increase in the share that the company occupies in the advertising market (which is also not always good).

In fact, this is a somewhat complicated calculation of the same advertising market share that a company needs to achieve. True, this method is based on a slightly different assumption: that large companies receive some advantages due to the law of economies of scale ( economies of scale) - while maintaining efficiency, advertising costs are reduced (see Fig. 1).

To construct an advertising intensity curve, the values of the product market shares owned by companies are plotted on one axis, and the corresponding values of the advertising market shares of these companies are plotted on the other axis. Thus, each company appears on the graph as a point. When you combine them, you get an advertising intensity curve, showing that the larger the company, the smaller the percentage of sales it spends on advertising. Or, in other words, the increase in advertising spending lags behind the increase in the company's product market share (of course, this occurs after the company reaches a certain product market share).

The company sets specific goals and determines the budget required to achieve these goals through an advertising campaign. Unlike all the methods described above, this one differs in the order of actions - first the goals are determined, and then the budget. In principle, this is an ideal order, but in practice this method is not common. First, most companies are limited in financial resources. Secondly, this method also does not guarantee the optimality of the budget. On the contrary, in order to achieve advertising goals, performers will try to play it safe and increase the budget as much as possible, systematically exceeding the optimal level.

Dorfman-Stayman method

According to the Dorfman-Stayman rule, the ratio of the advertising budget to total sales is equal to the ratio of the advertising elasticity of demand to the price elasticity of demand. Thus, this method relies on three indicators - the total sales of the company, the price elasticity of demand and the elasticity of demand for advertising. With these indicators, you can calculate the amount of the advertising budget:

R / P \u003d E r / E c,

P = P× E r / E c.

According to McMeekin with this calculation, the advertising and pricing strategies of the company are synchronized. The complexity of the method lies in the fact that it is necessary to correctly determine the two indicators of elasticity, which always causes difficulties.

In the most general case, the elasticity of demand for any indicator is the coefficient of change in total sales when the indicator changes by one percent (while all other indicators remain constant). If the elasticity is less than one, then a change in the indicator by one percent leads to a change in total sales by less than one percent (inelastic demand). If the elasticity is greater than one, then a change in the indicator by one percent leads to a change in total sales by more than one percent (elastic demand). Price elasticity of demand is calculated using the following formula:

K = (∆q/q)/(∆R/R),

where q- the total sales volume of the product before the price change;

∆q- the change in total sales of a product after a price change;

R- the price of the goods before its change;

∆R- change in the price of goods.

K = (∆q/q)/(∆R/R),

Usually, the company is able to calculate the price elasticity of demand itself. But the elasticity of demand for advertising is quite difficult to determine, so this indicator is best taken from marketing research. Lambin As a result of studies of numerous European brands, he determined the value of the elasticity of demand for advertising at 0.1. In a review of the early 1980s by Leone et al. , the values of elasticity of demand for advertising range from 0.003 to 0.482, most of them are less than 0.2. Seturman And Tellis and later researchers also confirm that the elasticity of demand for advertising does not go beyond 0.1-0.2.

One of the limitations of this method is that it is applicable only to products with price elastic demand.

The travel company that sells the tours has determined the following parameters:

the cost of one ticket = 500 dollars;
sales forecast = 200 tours (or 100 thousand dollars);
price elasticity of demand = -2;
elasticity of demand for advertising = 0.1.

Substituting this data into the formula, we get the optimal advertising budget = $5,000.

When the price changes, the advertising budget is recalculated in several stages. Suppose, for example, that the company reduced the cost of vouchers by 10%, that is, to $450. Such a decrease in price will lead to an increase in the sales forecast by 20%, that is, up to 240 vouchers (or 240 × 450 = 108 thousand dollars). Substituting the new data into the formula, we get a new advertising budget = 5.4 thousand dollars. However, this will only be an intermediate figure, because the increase in advertising costs by itself will increase the sales forecast by 0.8% (or about 2 × 450 = $900). Thus, the total sales forecast will be 108.9 thousand dollars, and therefore the advertising budget will increase to 5.45 thousand dollars. Due to the insignificance of the amounts, you can stop at the last advertising budget and not adjust it further. However, with larger amounts, the "adjustment" of the advertising budget will have to be carried out as many times as necessary (until the amounts become insignificant).

Danaher-Roost method

Danaher And Rust consider advertising as an investment and offer a formula for calculating the advertising budget that will allow you to get the maximum return on investment in advertising.

To determine the optimal level of advertising spending, you first need to set a clear financial goal. Consider three such possible goals. The first of these is maximizing the profitability of advertising spending (profitability is defined as the additional profit received solely from advertising, minus advertising expenses). The financial goal can also be to maximize the return on advertising investment (defined as a percentage as the ratio of advertising spend to the amount of return on investment in advertising). Another goal may be to maximize advertising effectiveness (effectiveness is defined as the ratio of the effect obtained as a result of advertising to advertising costs).

Now let's look at these goals one by one.

Let's assume that we have the ability to accurately measure advertising effectiveness, which can be (at least in principle) directly related to revenue. Then you can derive the formula for the profitability of advertising costs:

E(1) = kf - c,

One of the main problems in this formula is the unknown coefficient k.

E(2) = kf/c,

C. Maximizing the return on advertising investment

This criterion is most preferred by financiers, who are accustomed to evaluating any project based on the return/benefit comparison of these projects.

In principle, the idea of equating advertising spending with investment is not new. Back in 1976, vice president of an American advertising agency JWT Nariman Dhalla wrote that in order to improve business results, managers must treat advertising as a capital investment.

E(3) = (kf - c)/c = kf/c - 1 = E(2)- 1,

As in the two previous formulas, this one also has a coefficient to, which is extremely difficult to determine. However, in this case, it can be ignored. It can be seen from the formula that as the value increases f/c increases in importance as E(2), and E(3). From this we can conclude that maximizing advertising effectiveness and maximizing the return on investment in advertising are essentially the same thing. Moreover, the ratio f/c, which is to be maximized, does not contain a hard-to-determine coefficient to. From this it turns out that in practice it is quite possible to calculate both the advertising effectiveness and the return on investment in advertising. And this, in turn, makes it possible to derive a formula for determining the optimal level of advertising spending.

Derivation of a formula for calculating the optimal level of advertising costs

In order to fill the above calculations with concrete content, let us take as an example the planning of an advertising campaign on television. Such planning in world (including Russian) practice is carried out with the help of the so-called total rating units of television programs - Gross Rating points(hereinafter - GRPs). GRPs - is the sum of all the ratings that the TV shows (and hence the specific advertisements placed on them) have had for reporting period. Ratings are usually calculated for regular broadcasts. The rating of a TV show actually reflects the relative reach (or size) of the audience. If, for example, this TV show was watched by 10% of TV viewers (of the total number of all TV viewers in this period), then the rating of such a program is 10. When advertising is placed in different TV shows, or in the same one, but several times, the ratings of TV shows are added up and thus GRPs are obtained. To determine the optimal level of advertising spending, you must first find out how the cost of purchasing a certain number of GRPs correlates with the effectiveness of GRPs.

Cost of GRPs

On fig. 2 shows a typical cost curve. This curve reflects two main assumptions that have long been tested in practice. First, the more GRPs purchased, the greater the total purchase cost. Obviously, the higher the rating of programs and the greater the number of programs in which the advertiser intends to place advertising, the greater the advertising costs. And secondly, the more GRPs purchased, the lower the cost of each GRP unit (due to discounts) 1 .

Rice. 2. GRP Cost Curve

Such a function is described by the following formula:

C(g) = c x g d, (1)

where g- number of purchased GRPs;

C(g)- cost of purchasing GRPs in quantity g;

from- the cost of purchasing one unit of GRP;

d- coefficient reflecting the amount of discounts when buying GRPs in quantity g.

Values d range from 0 to 1. The smaller the discount, the d closer to unity. At d, equal to one, there are no discounts at all.

Efficiency of GRPs

Advertising campaigners often hope that the more GRPs that are generated during an advertising campaign, the greater the impact of that campaign. The effect here can be understood as reaching the audience, increasing sales, etc.

The curve in fig. 3 links number of GRPs - g and efficiency - f(g). It is based on several assumptions. First, there is a minimum level of GRPs - g(min), which must be purchased in order for the advertising campaign to have at least some effect. Second, a further increase in the number of GRPs leads to an increase in efficiency. Third - after the saturation level, the effectiveness of GRPs obeys the law of diminishing returns. (diminishing returns)- with the purchase of each next rating, the return on it (efficiency) decreases compared to the purchase of the previous rating (this dependence is reflected by the coefficient b).

Rice. 3. Dependence of advertising effectiveness on GRP

This function is described by the following formula:

f(g) = f(max) - a x g(–b) for g > g(min),

At the minimum level of GRPs, we obtain the following formula:

f(gmin) = f(max) - a× g(min) (-b) .

From it you can get the value of the coefficient but:

a = [f(max) - f(gmin)] × g(min) b .

Thus, the effectiveness of GRPs in the amount g can be expressed as follows:

f(g) = f(max) - [f(max) - f(gmin)] × (g/gmin) (-b) .(2)

On fig. 4 shows the advertising efficiency curve (or advertising return on investment) built on the basis of the cost curve and the efficiency curve of GRPs, formulas 1 and 2, respectively. All the results of the calculations, as well as the assumptions that were made before the calculations and which do not contradict each other, show that the optimal level of advertising costs does exist. From the obtained formulas, using the simplest differential calculations, you can find an equation for determining the optimal number of GRPs:

g(opt) = g(min)× [ ((f(max) - f(gmin))/f(max))× (d+b)/d)]1/b. (3)

Rice. 4. Advertising efficiency curve

The optimal number of GRPs maximizes both advertising effectiveness and advertising return on investment.

Knowing the optimal number of GRPs, you can find the cost of buying GRPs g(opt) - c(g opt). It is this cost that will equal the optimal cost of conducting (optimal budget) a certain advertising campaign.

In order to use formula (3), it is necessary to know all five of its constituent elements. Two of them are found empirically.

Any experienced media planning expert will be able to more or less accurately determine the minimum number of GRPs, after which a rapid increase in the effectiveness of an advertising campaign begins - g(min). The same can be done with the help of computer programs used in media planning. Having determined the value of the minimum number of GRPs, you can immediately determine the efficiency obtained by purchasing GRPs in the amount g(min) - f(gmin).

The third component of the formula - the maximum possible efficiency in the absence of restrictions on advertising costs - f(max) equals 1, since any efficiency cannot be more than 100% (that is, you cannot reach more than 100% of the audience, you cannot conquer more than 100% of the market, and so on).

The next two elements of the formula are coefficients d And b- derived from formulas (1) and (2):

d = ln[B/c(gmin)]/ln[g(B)/gmin] (4)

b = -ln[(f(max) - f(gB)/(f(max) - f(gmin)]/ln[g(B)/g(min)], (5)

Thus, we have obtained a semi-empirical formula for calculating the optimal number of GRPs, the knowledge of which is necessary to calculate the optimal advertising budget.

In order to check how the resulting formula works, consider the following example from the New Zealand practice of media planning.

Let's say the budget for a television advertising campaign is $100,000. As an indicator of effectiveness, we take the reach of the audience (Reach). It is known from experience that buying less than 100 GRPs has almost no effect (i.e. advertising in the same TV show so many times that GRPs does not exceed 100, or advertising in several TV shows with a total GRPs not exceeding 100, or placing advertisements in several TV shows several times, so the total total GRPs again does not exceed 100). The target audience of the advertising campaign is women aged 25 to 49. From data collected by the company AGB McNair New Zealand Ltd. in June 1995, it follows that with the purchase of 100 GRPs, the coverage of our target audience was 15.75%. The purchase price for 100 GRPs was $49,800. When placing ads, discounts were provided (60 seconds cost 1.8 times more than 30 seconds, not 2 times). So buying 200 GRPs would cost $49,800 x 1.8 = $89,640.

Using formula 1, we obtain two equations:

1.8 x 49800 = FROM× 200 d;

49 800 = FROM× 100 d.

Hence the coefficient d equals:

d = ln 1,8/ln 2 = 0,848.

Now, from formula (1), you can get the cost of one GRP unit:

FROM= 49,800 × 100 (-0.848) = $1,002.8

Therefore, $100,000 allocated to a television advertising campaign can buy 228 GRPs:

g(B)= (100,000/1002.8) (1/0.848) = 228 GRPs.

With the purchase of this number of GRPs, our target audience coverage will be 47.86% (according to AGB McNair New Zealand Ltd.).

Now let's calculate the coefficient b:

b = -ln[(1 - 0,4786)/(1 - 0,1575)]/ln = 0,5822.

Thus, all the components of formula (3) have been determined, and now it is possible to calculate the optimal number of GRPs:

g(opt)= 100 × [((1 - 0.1575)/1) × ((0.848 + 0.5822)/0.848)] (1/0.5822) = 183 GRPs.

The optimal number of GRPs turned out to be lower than the number of GRPs that can be bought by spending the entire budget (228 GRPs).

These calculations show that the maximum return on investment in advertising is possible with lower GRPs and therefore advertising should not be spent on the entire allocated budget.

Substituting all the data into formula (1), we obtain the optimal level of advertising costs:

c(gopt)= 1002.8 × 18300.848 = $83,182

And the efficiency or in this case the coverage of the target audience when buying 183 GRPs is 40.73%:

f(gopt)= 1 - (1 - 0.1575) × (183/100) (-0.5822) = 0.4073.

Thus, by spending $17,000 less, we get more efficiency. The efficiency, defined in our case as the ratio of audience coverage to the cost of advertising, at the optimal level of advertising costs is 2.3 times higher than the efficiency when spending the entire advertising budget.

In the process of calculations, it also turned out that when determining the minimum number of GRPs - g(min) rather large errors can be allowed, and in this case, the optimal number of GRPs will still be determined more or less accurately. When substituting other values into the formula for determining the optimal number of GRPs g(min) the following picture emerged.

For values g(min) 75 to 125 difference of corresponding values g(opt) was 28 GRPs, with values g(min) 90 to 110 difference of corresponding values g(opt) was only 9 GRPs. From this it can be concluded that g(opt) not too sensitive to some fluctuations g(min). This circumstance allows media planning experts not to worry too much about a not entirely accurate definition. g(min).

Conclusion

As practice shows, the problem of determining the optimal advertising budget does not have an absolute solution. However, this does not mean that companies do not have any benchmarks in this area. In each case, technical calculations should be preceded by a thorough analysis of the situation and existing methods for determining the advertising budget. Finding suitable methods and "tuning" them to specific situation can prevent large financial losses and significantly increase the effectiveness of an advertising campaign.

Literature

Danaher, Peter J. and Roland T. Rust. Determining the Optimal Level of Media Spending, Journal of Advertising Research, January/February 1995.
Danaher, Peter J. Optimizing Response Functions of Media Exposure Distributions, Journal of the Operational Research Society, July 1991.
Kaplan, Robert S. Discount Effects on Media Plan // Journal of Advertising Research. Vol.11. - No.3. - 1971.
Krueger, Joseph. Developing a Marketing Budget, Target Marketing, October 1996.
Lynch, James and Graham J. Hooley. Increasing Sophistication in Advertising Budget Setting, Journal of Advertising Research, February/March 1990.
McMeekin, Gordon. How to Set Up an Advertising Budget, The Journal of Business Forecasting, Winter 1988-1989.
Mitchell, Lionel A. An Examination of Methods of Setting Advertising Budgets: Practice and Literature // European Journal of Marketing. - Vol. 27. - No. 5. - 1993.
Turner, Augustine. Cost-Effective Advertising, Marketing, May 1989.

1 In Russian and international practice, it is possible to purchase not a certain amount of time in certain programs (which is called a fixed advertising placement system), but a certain number of GRPs (which is called a “floating” advertising placement system). The "floating" system allows you to protect advertisers from unexpected drops in the rating of certain programs in which advertising is placed. Because the floating system buys GRPs, not time, airing as many commercials as needed to fill the amount of GRPs purchased. Therefore, in case of any unforeseen drop in the ratings of programs, the advertiser will get his own - due to additional commercials. With a fixed system, only a certain amount of time is bought in certain programs, and the number of GRPs collected is calculated after the fact.

Non-analytic methods are based on experience or simplified decision rules. Non-analytical methods greatly simplify planning, but have little to no connection with marketing goals.

Analytical Methods are based on the search for a functional relationship between the advertising budget and the level of achievement of marketing goals. This method requires the advertiser to form their advertising budget based on specific goals and objectives and their costs. The sum of all these costs will give an approximate figure for the budget appropriations for advertising. The advantage of this method is that it requires management to clearly state their ideas about the relationship between the amount of advertising costs, the level advertising contacts and sales efficiency.

From a level position, the advertising budget can be planned based on several marketing strategies, set an upper or lower level for each of the marketing variables - price and advertising budget. Then the market penetration strategy can be specified using the matrix "product price - advertising budget" (Fig. 7.8).

The types of advertising budget plans include the following options: limit planning, when the budget is set by the advertiser and advertising activities are carried out within the allocated funds; floating bar means changing the advertising budget depending on the marketing situation; planning with a flexible target deficit means that performers can spend more money on an advertising campaign if it becomes possible to achieve some pre-specified goals that are specified as important, but not mandatory; tunnel planning is used when planning the budget for several advertising agencies depending on the media, and the transfer of funds from one to another is not possible; free planning lies in the importance of allocating any amount of the advertising budget to achieve marketing goals.

1. Calculation of the minimum advertising budget. There is a list of types of advertising performed by various advertising advertising agencies or one integrated agency. Each type of advertising contains a certain number of different evaluation criteria and performance values. The size of the advertising budget is known. It is necessary to determine a set of types of advertising that provide the required effectiveness with minimum cost within the advertising budget.

Thus, the goal of the problem is to minimize the cost of a set of types of advertising required for an advertising campaign.

Task parameters: P- number various kinds or types of advertising offered to the advertiser; T - the number of advertising effectiveness criteria; aij- content i th performance criterion in j-th form of advertising i=1,…,m:, j = 1,…,n; b i- amount of value i-th criteria required by an advertiser in an advertising campaign ; with i - unit cost i-th type of advertising; x i is the quantity i-th the type of advertising included in the advertising campaign for a given advertising budget. The conditions for determining the quantity of each type of advertising have the form of a linear mathematical model

The optimality criterion C has the form:

Solving the mathematical model, the values are determined x i- share of funding i-x types of advertising necessary to solve the tasks at hand, the amount of which determines the optimal minimum advertising budget

2. Budget development based on availability Money(residual budget method). Using this method means that the firm spends as much money on advertising as its management thinks it can afford. This is the simplest method that does not take into account the real goals and objectives of the company, but rather shows the state of affairs in the absence of specific advertising objectives. The budget is cut when things go wrong; when there is money, it is spent. Such advertising expenses are justified as long as they do not exceed the optimal level of normalized advertising costs or the amount of profit from which they are formed, or the size of the marketing communications budget.

3. Development of an advertising budget for cost planning basis. The advertising cost plan is an estimate of the costs of various planned activities aimed at achieving the goals. Its purpose is to determine the dependence of turnover growth on advertising costs.

4. Calculation method as a percentage of the amount of sales(current or expected) or to the selling price of the goods, i.e.

This is the easiest way to calculate your advertising budget. The sales forecast is calculated on the basis of compiling a statistical sales trend. The percentage is traditional for each enterprise or is guided by traditions in the industry. About 15% of entrepreneurs use this method. For example, an advertising share at the promotion stage trademark reaches 20% of revenue, at the stage of a fait accompli promotion 0.5 - 4%. It is possible to single out periods that are more attractive for an advertising campaign and less attractive for this.

In order to plan the amount of appropriations for holding advertising company, first of all, on the basis of experience, it is necessary to build an indicative schedule for the dynamics of the sale of goods based on the seasonality of demand for goods or the ongoing marketing policy of the enterprise (see Figure 7.9). Advertising fees are determined as a percentage of revenue. The graph in fig. 7.9 will allow you to predict the advertising budget.

Rice. 7.9. Dynamics of seasonality of sales

Based on Fig. 7.9 two sentences can be distinguished:

BUT). In areas of revenue failure (1st and 3rd quarter of the year), it is necessary to carry out an advertising campaign in order to even out the seasonal sales wave. The advertising budget must be calculated from the projected peak profit of the upcoming seasonal sales wave.

IN). To exacerbate the wave of seasonality in sales, it is necessary, within the framework of the company's available funds, at the border of 1 and 2, as well as 3 and 4 quarters (Fig. 10.8), to begin an intensive advertising campaign lasting until the period of maximum sales.

The disadvantage of the percentage of sales method is the possibility of violating the basic principle of marketing. The method is based on the fact that sales are the cause of advertising, and not the effect, which is completely wrong. Advertising activity should increase sales, and not be in terms of sales results. If advertising is automatically activated as a result of increased sales and falls as a result of falling sales, then all the conditions of advertising activity are ignored.

This method of calculating the advertising budget does not allow experiments with new types of advertising and interferes with long-term planning. Using this method, it is impossible to form an advertising budget taking into account the characteristics of each individual product and each individual sales territory. In addition, marketing, advertising science and practice require an increase in advertising costs with a decrease in sales. However, the method of calculating "as a percentage of the amount of sales" does not provide for this.

5. Competitive parity method. It provides for the amount of the advertising budget (R) at the level of the corresponding costs of competitors:

where Ri is the advertising budget of the i-th competitor ( , i.e. .: "Share in advertising media = Market share of the product in the mind of the buyer = Market share." The underlying assumption of a direct relationship between advertising spend and market share is wrong. The budget will not be calculated correctly until the competition in the market is correctly defined.

Two arguments are given in support of this method: the cost level of competitors represents the collective wisdom of the industry; Maintaining competitive parity helps to avoid competitive advertising competition, which is costly.

At the same time, they do not take into account: competitors can dictate your budget to you and force you to unjustified costs; competitors have their own strategies, you have your own and, accordingly, a different allocation; following competitors, one cannot become a market leader, etc.

6. The method of equity participation in the market. In industries where product similarity is high, there is usually a high ratio between market share and industry advertising share. Knowing this, some firms aim to achieve a certain market share and then set an appropriate advertising percentage of the budget. This method is based on the following proposition: ceteris paribus, the distribution of the total market capacity between individual firms over time becomes proportional to the shares of these firms in the total advertising costs. Then the advertising budget i-th firm is defined as

where di– market share i th firm; Rj- advertising budget j th competitor firm.

In general, in order for a firm to maintain its market share, it is necessary to maintain a share of participation in advertising at a level exceeding the market share. According to Peckham's formula, when a new brand of product is introduced, the advertising budget should exceed 1.5 times the market share expected in two years. For example, if a firm owns 10 percent of the market, then it should spend 15 percent of industry advertising on advertising.

7. Technical budget method. This method is based on the analysis of the profitability threshold of advertising costs.

Q = S/(P - C),

where Q - additional sales volume; S - advertising costs; P is the price of a unit of goods; C - costs (usually variable costs) per unit of goods; (P - C) - marginal profit per unit of goods. Required additional revenue = S/((P-C)/P).

With this method, you can evaluate the level of effectiveness of advertising in order to obtain the desired value of sales growth. It can be judged whether the budget under consideration does not imply unrealistic estimates of the share of the existing market. Here, advertising is seen as an investment, not just a fixed cost.

W \u003d t * U * Wk / Uk,

For example. Let's determine the advertising budget for Pepsi Co. if it wants to have a market share of 30%. The share of advertising costs in the sales volume is: for Coca Cola - 1.25, for Pepsi Cola - 1.66. The market share of Coca Cola is 23%, the advertising budget of the Coca Cola Company is 28178149 USD. W = 1.25/1.66 x 30% x 28178149/23%=$48809454.

9. Method goals and objectives. This is the most scientific method used by large advertisers. It analyzes the current situation, sets goals, identifies promotional tasks, calculates how much it will cost, and calculates the overall budget. Increasing the advertising budget enables the company: at the prevailing price to sell more; sell a given volume of products at a higher price; sell more volume at a higher price (Figure 7.10).

Due to the increase in the advertising budget (W), the demand function shifts upwards to the right. The shift in the demand function due to advertising is greater the more the advertising budget increases. It is known that for each demand function there is the most profitable combination of price, product (P) and its quantity (Q). If the demand function shifts, then the maximum profitable ratio of the considered parameters also changes.

However, the maximum profitable sales volume of each subsequent value, located to the right of the achieved sales function, can only be realized with an advertising budget that increases in a larger proportion. It will be more difficult to win one additional buyer, the more there are already. The criterion for the optimality of the advertising budget in this case is the maximum amount of net profit, that is, the excess of gross profit over advertising costs.

In a formalized linear form, the method for determining the volume of the advertising budget, taking into account the goals and objectives, is as follows:

where p- the cost of one so-called rating unit; n 0- the number of rating units required for conditionally 100% coverage of the target audience; S is the desired level of sales volume; Smax - the maximum level of sales (conditionally 100% coverage of the target audience).

where p– cost of one rating unit; n 0- the number of rating units required for conditionally 100% coverage of the target audience; Nmax- number potential clients advertising company; N- the number of customers who will become regular customers of this company; k- the ratio of the number of customers of a given firm who have become regular to the number of customers who will try the product of this firm; k 0- the ratio of the number of customers who try the product of this company to the number of those who saw the advertisement of this company.

It is easy to see that - is the number of customers who have tried the product of this company, and - is the number of potential customers who saw the advertisement of this company.

10. Independent Average Forecast (NUP/5B). It is based on expert assessments of the firm's management. Depending on the goals of the advertising campaign, 5-10 experts, based on experience, build independent forecasts for the advertising budget. Each expert should build his own forecast independently of others, without discussing it with colleagues. The forecast budget is determined as the arithmetic mean of the experts' data, taking into account their weighting significance. But the best is median all independent evaluations. (Median- the value of the varying forecast attributable to the middle of the ranged population. Within the forecast interval, the median is calculated using the formula:

M e \u003d X m H + d i (0.5N - F i -1) / f i ,

where X m H - the lower limit of the median interval; d i- the value of the partitioning interval; F i-1- accumulated interval frequency; N- number of expert assessments; fi, is the frequency of the median interval.) From the point of view of statistics, such averaging gives acceptable results and does not depend on extreme estimates.

11. Dorfman-Stayman method. According to the Dorfman-Stayman rule, the ratio of advertising budget to total sales is equal to the ratio of advertising elasticity of demand to price elasticity of demand. Thus, this method relies on three indicators - the total sales of the company, the price elasticity of demand and the elasticity of demand for advertising. With these indicators, you can calculate the amount of the advertising budget:

R \u003d P E r / E c.

12. Method of modeling the relationship between the level of communication and consumer behavior. The initial premise of this method is the assumption that in order to achieve the planned sales volume, it is necessary to have a sufficient number of consumers, each of whom must buy a certain number of commodity units at the appropriate price per piece. To do this, it is necessary to achieve a certain level of awareness, motivation for a trial purchase and maintain the intensity of purchases during the first year after the product enters the market. Quantitative ratios between audiences at the indicated stages of readiness to purchase are determined as a result of advertising research. Having determined them, they calculate the required degree of coverage and frequency of exposure, develop a plan for the use of advertising media. After that, you can determine the estimated amount of advertising costs.

The advantage of the method is the objective validity of costs, their linkage with the set communication goals. Disadvantages: complexity, labor intensity, high cost.

13. Payment plan. He views advertising as an investment. It is assumed that it is possible to pass several years before the company covers the initial costs and starts to make a profit. Using advertising as an investment, you can quickly reach the required level of return on sales.

14. Advertising budget for an established brand- one of the most common situations. The methods for determining the advertising budget for a brand are test advertising, statistical forecasting, and purely practical method- Schroer's method.

- Dough in but I am advertising. In this case, several similar markets are selected and each of them is allocated a different amount of advertising funds. How much depends on the experimental values of the total budget, which may be more or less than the corresponding indicator of the previous year. The sales results in each of the test markets are then compared. The level of costs that, depending on the goals of the company, gives the greatest sales volume or the greatest profit, is used as the advertising budget of the entire market.

If test budgets are distributed randomly across markets, then we can assume that all other factors are averaged. This means that advertising will be the determining factor. Even if the budgets are not entirely randomly distributed, discrepancies in other factors can be eliminated statistically after the results are obtained (for example, using analysis of covariance).

- Statistical forecasting. W advertising spending and sales volume are compared over time (preferably monthly, quarterly or yearly to identify short and long term effects). To calculate the relationship between them, statistical tools are used (usually regression analysis). Based on the revealed dependence and the sales plan for the future period, the amount of the advertising budget is determined. In statistical forecasting, the influence of all other factors is taken into account mathematically, and not experimentally.

The quality of ad spend. The size of the advertising budget does not fully determine the effectiveness of the marketing policy. Budget spending should match the right choice target audience, means and channels of advertising, methods of advertising, etc. On fig. 7.13 shows the dependence of sales volume depending on the quality of the advertising campaign.

Optimization of the advertising budget allows companies to stay stable in their market. European experience shows that with advertising costs up to 0.5 million dollars. the growth of fame is linear depending on the level of costs. With an increase in costs over 1 million dollars. fame grows faster: for each additional unit of expenditure, a higher level of fame is achieved than for initial stage. In this case, fame is fixed in a certain period of time and includes recall (substantial attractiveness of advertising, potential availability for purchase, experience of real purchases).

All firms or companies use different methods of budgeting an advertising campaign and develop their own cost distribution schedules for an advertising campaign.

Similar information.

Advertising management consists mainly in setting goals, planning activities aimed at achieving these goals, putting plans into practice and monitoring their implementation. The main tool that ensures the implementation of all these functions is the advertising budget. In a sense, all administrative activity—reviewing what has been done, monitoring what is being done, and planning what is to come—is centered around the budget. Budgeting contributes to more accurate planning. It also contributes to the most profitable allocation of resources, and it also helps to keep costs within predetermined limits.

An advertising budget involves decisions in two areas: the total amount of advertising funds, often referred to as appropriations, and how it will be used. As with most other decisions, in advertising, determining how much to spend is mostly a matter of good judgment. When there is no method to accurately determine the contribution of advertising to increase sales and profits, managers cannot rely on some simple formulas when developing a budget. On the contrary, they must take into account many factors and come up with a figure that, in their opinion, most fully meets the requirements of a particular combination of circumstances.

Difficulty in determining the exact size of the advertising budget, required by the company, due to the fact that advertising is only one of many factors that affect sales. Therefore, it is very difficult to single out the influence of advertising on the level of sales of certain goods and services. Both in promotion to the market and in direct sales, along with advertising, an important role is played by: price, distribution, packaging, product properties, consumer tastes, competition, professional quality distributors, market conditions, external economic factors, etc.

For example, the elasticity of sales response to price cuts is about twenty times greater than the elasticity of sales due to increased advertising spending. That is, a change in prices has a much greater impact on sales than a change in the amount of advertising.

Nevertheless, it is necessary to draw up at least an indicative advertising budget. On the one hand, to know the total amount allocated for advertising from the entire turnover of the company, on the other hand, to avoid obviously unreasonable spending.

Factors affecting the size of the advertising budget

Here are some of the most significant factors to consider: 1) the volume and size of the market, 2) the role of advertising in the marketing mix, 3) the stage life cycle product, 4) product differentiation, 5) profit margin and sales volume, 6) competitors' costs, and 7) financial resources. Each factor will be considered separately, based on the principle "ceteris paribus", which, of course, never happens in reality. All these factors are interdependent, interrelated, constantly changing, and when developing a budget, they must be considered together.

Consider the first factor - the volume and size of the market. The amount of the budget is determined depending on how many people need to be covered. Covering large, widely dispersed national markets is more expensive than reaching highly concentrated small local markets. However, when introducing a new product or seeking to expand the market, the size of the market remains to be determined. A relatively small number of advertisers can afford to enter the market with new products on a nationwide scale at once. Smaller firms are more likely to introduce products to market after market, region after region. It is much more reasonable to spend a sufficient amount of funds in a small area than to scatter these funds.

From a demographic point of view, reaching a broad heterogeneous market is more expensive than reaching one or two well-defined market segments. Diverse markets require the use of high-priced television, general magazines, and newspapers. Smaller, well-defined segments can get by with cheaper trade magazines and local radio, with less useless reach. High spenders usually have the advantage of a lower cost per thousand. However, the use of local media with increased selectivity allows you to reach specific market segments with a minimum of useless reach.

The next factor is the role of advertising in the marketing mix. The more significant the role of advertising in the formation of sales, the greater the size of the advertising budget is likely to be. In the consumer goods market, manufacturers of competing brands, whether self-service or not, find it necessary to pre-order their products, creating brand awareness and demand before the customer even enters the store. The dependence of the results of such a pre-sale on advertising leads to a higher advertising budget. In the marketing of industrial products, when the number of consumers is much smaller and easier to get in direct contact with, advertising plays a supporting role in personal selling, and the advertising budget is reduced. In real terms, sellers of industrial goods such as concerns, Yu. S. Steele and DuPont spend large sums on advertising. However, in relation to the volume of sales, the percentage of their advertising allocation is lower than that of the sellers of most consumer goods. The advertising budgets of large firms are also increased by the cost of prestige advertising, depending on how useful they find it to address the public with a statement of views on controversial issues or public policy issues that affect their interests.

An important factor in the marketing mix, which directly affects the size of the planned advertising costs, is the amount of funds that must be allocated for sales promotion activities aimed at both the consumer and the industry. retail. Due to sending out samples, distributing coupons, giving discounts to retailers, etc. often in the year of launching a new product on the market, much more is spent on sales promotion than on advertising.

Let's move on to the consideration of the third factor - the stage of the product life cycle. A new product, as a rule, requires more intensive advertising. The cost of bringing a brand new product into a highly competitive market can wipe out the entire first year's gross margin. Building brand awareness, including a period of trial sales and setting up a retail distribution network, requires a large upfront investment in advertising and promotion.

After the successful launch of a new brand, i.e. after reaching or exceeding sales milestones, gaining market share, recovering costs, etc., the firm can adopt one of the following three strategies: 1) growth strategy, 2) retention strategy, or 3) reaping the rewards achieved. The strategy for further growth requires a significant expansion of advertising, which is accompanied by a drop in revenue for the next period of time, but opens up opportunities for the brand to gain a higher market share. For established brands in a fully mature market, as is the case with most branded products, the strategy for maintaining the achieved position requires to maintain approximately the same relative level of advertising from year to year. The strategy for reaping the benefits of what has been achieved is designed to grow revenues over the next period of time and replenish funds through reduction in advertising spending and falling market share.

No less important is the fourth factor - product differentiation. When a product has a unique advantage that consumers instantly recognize during use, volume necessary advertising is, as a rule, less than in cases where there is no clear difference. A clear demonstration of the properties of such a product is an advertising message that does not require complex text and frequent repetition, which is clearly perceived, believed and based on which actions are taken. Less frequent and shorter visits cost less, and this will be reflected in the reduction in the budget as a whole. On the other hand, in the absence of visible differences between products of competing brands, the budget should provide funds for creating a promising long-term value of the advertising item in the form of a brand image.

The next factor is profit margin and sales volume. Indicators of the size of profit per unit of goods and indicators of sales volume are inseparable from each other. With a significant amount of profit - even if the sales volume is small - the advertiser has quite a lot of freedom in determining the size of the advertising budget.

A small profit per unit can be more than offset by a large sales volume.

One study found that branded products supported by relatively high advertising budgets cost more than other brands in the same product category. This raises an interesting question: Is the consumer really paying more for heavily advertised brands, or as gross margins rise, do retailers advertise more heavily? In practice, both are encountered. Advertising increases the value of branded goods in the eyes of consumers by allowing the retailer to charge a higher price, which in turn increases the advertising budget. This forward movement is naturally constrained by the elasticity of demand with price levels and competition.

We then look at how competitors' spending affects advertising budgets. The share of brands in total sales and total advertising spend within a product category tend to be closely related. In other words, a brand's share of sales is likely to correspond fairly closely to its share of total advertising spend. The share in sales volume is correlated with the share of attention gained, which in turn is a consequence of the share of advertising (the share of audible voice). This ratio can also be a self-fulfilling prophecy: the higher the sales, the more we spend on advertising. In any case, the estimated market share of the brand also implies a certain level of advertising budget, taking into account the total costs within the product category.

Costs alone do not guarantee advertising success, and competitors' costs should not be considered the sole determining factor. However, since the share of attention that goes competitive fight, correlated with market share, this factor should not be overlooked.

Finally, the last fact is as financial resources. The most obvious limiting factor in the size of the budget is the availability of financing funds. The advertising costs of entering the national market in many product categories are within the power of only a relatively few firms with huge financial resources.

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