Factors to be considered while Framing a Budget: Advertising Task, Competitive Framework, Market Dominance, Market Coverage, Media Cost, Market Task, Pricing, Frequency of Purchase

Companies’ expenditures on print, broadcast and other forms of advertising rely on the funds in their media budgets. Media buyers specialize in wringing the best array of exposures for brands and products out of their clients’ media allocations. Buyers’ efforts drive down the cost of each TV or radio spot, newspaper or magazine ad, billboard, transit ad or any other pay-to-play placement, maximizing advertising impressions and effectiveness. New media options take their places in the 21st-century media budget, expanding brands online.

Advertising Task

A more effective budgeting strategy would be the one which considers the firm’s overall promotional objectives. The budgeting then is done according to the requirements for meeting these goals.

Objective and task method:

The most logical budget setting method is the objective and task method whereby the company sets its promotion budget based on what it wants to accomplish with promotion. This method entails defining specific promotion objectives, the tasks needed to achieve these objectives and estimating the costs of performing these tasks.

Objective setting and budgeting should not come in sequence, one after another. They should be considered simultaneously because 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 approach used by the objective and task method is buildup approach consisting of three steps:

• Defining the communications objectives that are to be accomplished,
• Determining the specific strategies and tasks needed to attain them
• Estimating the costs associated with performance of these strategies and tasks. The total budget is based on the accumulation of these costs.

Implementing the objective and task approach is somewhat more involved. The manager must monitor this process throughout and change strategies depending on how well objectives are attained.

This process involves several steps:

1. Finalise Communication objectives.

Any company generally has two kinds of objectives viz. the marketing objectives for the product and the communications objectives. The first job is to establish the marketing objective and when that is done the net task is to determine what specific communications objectives will be designed to accomplish these goals. Communications objectives must be specific, attainable, and measurable, as well as time limited.

2. Determine tasks required:

The strategic plan designed to attain the objectives consists of various elements one of which could be advertising in various media, sales promotions, and/or other elements of the promotional mix. Each has its own role to perform and hence the specific tasks should be finalised.

3. Estimate aggregate expenditures:

The next stage is to determine the estimated costs associated with the tasks fixed the last step.

4. Monitor:

A regular monitoring is required as to how much the objectives have been attained effectively. If advertisements are an investment then a close monitoring of the invested amount and its return is must.

5. Re-evaluate objectives:

Once specific objectives have been attained the budget should be reevaluated to check how better it can be used to attain the other goals. Thus, 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 developed from the bottom to up, which is a proper and rational managerial approach. The method does not rely on past sales figures, forecasted sales, what the competition spends and considers only those factors, which are under the advertiser’s control.

6. Payout Planning:

The budgeting for a new product is a very different story because the first months of a new product’s introduction require heavier-than-normal advertising and promotion appropriations to stimulate higher levels of awareness and subsequent trial. James O. Peckham studied the Nielson figures of more than 40 years and estimated that a new entry should be spending at approximately twice the desired market share. But the major question is what will be the profitable amount of spending on promotion of the new product.

In order to determine this, marketers often develop a payout plan that determines the investment value of the advertising and promotion appropriation. The basic idea is to project the revenues the product will generate, as well as the costs it will incur, over two to three years. Based on an expected rate of return, the payout plan will assist in determining how much advertising and promotions expenditure will be necessary when the return might be expected.

Competitive Framework

In a market with a large number of competitors and a high advertising spending, a brand must advertise more heavily to be heard.

Market Dominance, Market Coverage

To get a good market share in comparison to their competitors, the company should have a better product in terms of quality, uniqueness, demand and catchy advertisements with resultant response of the customers. All this is possible if the advertisement budget is high.

Despite the empirical relevance of advertising strategies in concentrated markets, the economics literature is largely silent on the effect of persuasive advertising strategies on pricing, market structure and increasing (or decreasing) dominance. In a simple model of persuasive advertising and pricing with differentiated goods, we analyze the interdependencies between ex-ante asymmetries in consumer appeal, advertising and prices. Products with larger initial appeal to consumers will be advertised more heavily but priced at a higher level that is, advertising and price discounts are strategic substitutes for products with asymmetric initial appeal. We find that the escalating effect of advertising dominates the moderating effect of pricing so that post-competition market shares are more asymmetric than pre-competition differences in consumer appeal. We further find that collusive advertising (but competitive pricing) generates the same market outcomes, and that network effects lead to even more extreme market outcomes, both directly and via the effect on advertising.

Media Cost

Media cost is the price you pay display, run, or present your advertisement or campaign during a specified date range or campaign period. There are many different ways to price media including points, impressions, flips, clicks, leads, actions, days, weeks, months, etc. Media Cost excludes the cost to create the advertisement (copy or artwork) and other costs.

Market Task

Marketing management has to do a set of tasks necessary for success in marketing. The basic tasks of marketing are as follows:

• Develop marketing strategies and plans
• Creating marketing information system
• Build customer relationship
• Build strong brands
• Determine marketing mix
• Deliver value
• Communicate value
• Create long-term growth
• Implementation and control

Pricing

Advertising costs are a type of financial accounting that covers expenses associated with promoting an industry, entity, brand, product, or service. They cover ads in print media and online venues, broadcast time, radio time, and direct mail advertising.

Advertising costs will in most cases fall under sales, general, and administrative (SG&A) expenses on a company’s income statement. They are sometimes recorded as a prepaid expense on the balance sheet and then moved to the income statement when sales that are directly related to those costs come in.

Advertising costs are typically not a surprise to a business owner. In fact, many will have budgeted for a certain amount of advertising costs. The U.S. Small Business Administration notes that most companies set their marketing budget based on revenues.

Frequency of Purchase

Purchase Frequency is the number of times an average customer purchases a good or service from your store in a specified time period.

Purchase Frequency = No. orders / No. unique customers

Remember that some businesses won’t typically have people buying from them regularly. Online stores that sell larger, high-value goods can expect to have a lower Purchase Frequency than businesses selling consumable products.

Reasons:

Repeat shoppers drive business success. One of the most common mistakes businesses make is constantly chasing new customers. Why is this a mistake? While new customers are important, it’s your existing customers who drive the success of your business. There are two main reasons for this. Repeat customers are cheaper and easier to acquire than new shoppers. According to one estimate, trying to recruit one new customer costs up to five times more than nurturing an existing one. Second, engaged and retained customers are your best fans and biggest advocates! That same research study found that loyal customers spend 60% more than one-off customers, and are five times more likely to share positive word of mouth messages about your business. If your customers are busy recruiting new customers on your behalf, it means you don’t have to! So, keeping your existing customers coming back time after time makes sense for your bottom line.

It helps you to understand how to drive profitability. You have two main routes for increasing sales among your existing market: you can either attempt to encourage your customers to buy more with each visit, which is known as increasing the average order value, or you can attempt to get your customers to shop more frequently with you. Until you know how frequently your customers are already purchasing from you, it’s impossible to choose the best possible route.

It helps you segment your market and structure your marketing strategy around your segments’ habits. After decades of research, supermarkets know that they can essentially segment their customers into two types based on their habits: weekly shoppers, who try to grab everything they need for the week in one go, and top-up shoppers, who might also do a weekly, or even a monthly shop, but who pop in to buy the odd item they need here and there. Knowing the distinction is important there is little need in trying to tempt top-up shoppers into greater purchasing frequency with bulk discount deals, for instance. By combining knowledge about how often your customers are purchasing with demographic and other information about your customers’ buying behavior, you can perform a segmentation analysis that can help you create highly targeted, powerful marketing campaigns.

It’s the basis for deeper understanding into your operations. While customer purchasing frequency is a simple metric, it holds the key to much deeper analysis that can help you optimize your processes. For example, starting with frequency of purchase data, you can pinpoint the exact days of the week and times of the day when the most profitable purchasing takes place vital information for smoothing inventory management and supply chain operations. You can also identify those customers that contribute the most to your overall revenues and profitability, and develop appropriate methods to reward them.