Tag: University of Mumbai BMS Notes

Advertising has become an essential marketing activity in the modern era of large-scale production and severe competition in the market.

Advertising permeates the Internet, network television, daily newspapers and roadside billboards. Products, services and ideas are sold through advertising, enabling businesses to attract customers for their wares. Internet advertising is rapidly displacing print advertising, due its convenience of use, cost effectiveness, and ease of distribution.

It performs the following functions:

1. Identifying Brands and Products

Products, services and ideas are sold through businesses that are differentiated by their brand identities. Brand identity is communicated to the public via advertising. Consumers build emotional relationships with certain brands with which they become increasingly familiar through the years, thanks to advertising.

2. Providing Information to Consumers

Advertising supplies the necessary information to consumers so that they know what is available and where to buy it. It broadcasts information on products, services and ideas sold on the open market through a variety of media portals. It reveals the special features being sold, what color and size the product is and which stores carry it.

3. Persuading Consumers to Purchase

Powerful, visual advertising presentations compel consumers to purchase goods, services and ideas as a way to achieve emotional fulfillment. Persuasion is the core mission of advertising. Advertising tells you how the product, service or idea you are considering will improve your life. According to Jeremiah O’Sullivan R, author of “The Social and Cultural Effects of Advertising,” advertising feeds on the concepts of ideology, myth, art, sexual attraction and religion.

Advertising infuses images and ideas into products and services, just as the meanings of products and services are infused into images and ideas, notes O’Sullivan.

4. Previewing New Trends

Previews about the virtues of new products, services and ideas motivate consumers to obtain them because they don’t want to be left out. Advertising lets consumers in on up-and-coming trends and new markets. They offer coupons, rebates and trial offers on new products, services or ideas to recruit new customers and induce existing customers to try things. Advertisers preview new or improved products, services and ideas to consumers in order to appeal to their sense of wanting to be in the know about leading edge trends.

Previewing new trends is a technique employed by advertisers that capitalizes on consumers’ desires to “keep up with the Jones” by owning the latest and greatest product, service or idea.

5. Generating Product Demand

The demand generated by advertising, public relations, and sales promotion “pulls” the goods or services through channels of distribution, notes “Reference for Business.” One of the powerful functions of advertising is to generate consumer demand for specific products, services and ideas through ad campaigns that target the audiences that are most likely to buy them.” Products, services and concepts are sold in volume, according to the consumer demand for them.

6. Building a Customer Base

Consistent quality advertising increases consumer loyalty for a product, service or idea. Advertising seeks to maintain the current customer base by reinforcing purchasing behavior with additional information about the benefits of brands. The goal of advertising is to build and reinforce relationships with customers, prospects, retailers and important stakeholders.

7. Displaying Competitive Pricing

Advertising displays consumer goods with competitive prices relative to the current market, thus educating consumers about what things should cost. Advertising lets you know what the competition is doing, when the next sale is, and how you can receive the latest coupon or rebate and seeks to assure you that you are receiving the best value for your money.

1. Manufacturers and Advertising

Manufacturers and producers, who intend to make available goods to the people at profit, do take full advantage of advertising as a major weapon to popularise their products and services.

The specific benefits that accrue to the manufacturers are:

(a) It increases and stabilizes the sales turnover

Even the best product cannot be sold on its own, though it is said “good wine needs no bush”. People should know that the product is the best. In a highly sensitive and competitive mechanism, profits of the firm cannot be maximized by mere reducing the costs but by multiplying the sales-turnover.

Advertising does this, by changing the consumer attitude favourably. Further, the sales turnover rate so attained should be maximized and maintained at any rate. Advertising does this by repeat sales. A regular, effective and frequent advertising helps in building more loyal class of customers at all times.

(b) It maintains the existing market and explores the new

A forward looking company always has its eyes on the future business prospects though it cannot lose sight of the current position. A company’s success is reflected not only in creating market but its maintenance and extension.

It is a natural feeling that when advertising campaign decreases, the products are not measured up to, the consumer expectations. Further, current business situations warrant a forceful entry into new markets. In such newly exposed markets, advertising does spade-work for the sponsor to sow the seeds of prosperity.

(c) It controls product prices

Through advertising, it is possible to control the product prices with profit, particularly the retail prices. Very often the greedy retailers exploit the needy consumers by charging higher prices.

If this consumer exploitation is not bridled, both the producers and consumers are to suffer for no fault of theirs. The manufacturer can help him and help consumers by printing the consumer prices on the product packages. Today, product package protects not only the contents of it but also the consumer interest.

2. Middlemen and Advertising

In the chain of distribution, middlemen act as the essential links between the producers and the consumers. Their existence is justified by the functions they perform and the services they render.

Here, benefits of advertising are seen from angle of retailer a last link in the chain of distribution:

(a) It guarantees quick sales

Every retailer holding the stocks of different producers is interested in quick turnover. Advertising, by bringing these whole ranges of products to the notice of consumers, quickens the pace of sales.

Faster sales imply the specific advantages such as reduced capital lock-up, loss of stock, and increased profits. Advertising gives him much leeway and freedom to better serve the needs of consumers. Therefore, he earns better by serving better.

(b) It acts as salesman

Advertising has been rightly described as salesmanship in print. What a travelling salesman does for the selling house is done by advertising at least cost. That is why; most retail organizations do not employ large army of travelling salesmen.

Instead, they are willing to spend on advertising which attracts consumers to the stores where the counter salesmen cater to their needs. In fact, advertising has been heralded as a boon to retailers who are freed from the problems of sales management. In fact, goods are sold in advance by advertising.

(c) It makes retail price maintenance possible

The consumers are very keen on getting quality products at stable price over a longer period of time. Each consumer has his or her own family budget which he or she strives hard to match the expenditure to the disposable income for a socially acceptable decent living.

If the prices go on changing abruptly, those individual budgets are likely to be distorted to such an extent that the consumers have to think of substitutes for the products they are enjoying at present.

The budget tally may involve even the shift in the brand preference. Consumers behave a sigh of relief because; the advertised products publish the retail prices that are likely to be in force at least for three to six months and in some cases over a year.

3. Sales-Force and Advertising

Sales of the selling house are the result of the efforts put in by both direct and indirect approached. Personal selling is the direct method of selling, while advertising is indirect. Both are important in the scheme of successful marketing. Both are to be dovetailed for the best results.

The sales-force stands benefitted as under:

(a) It creates colourful background

A good salesman is nothing less than an actor who by his skill in selling wins the hearts of consumers and sells the company products and services. All such sales acumen has value and the glamour only when he has a matching back-drop.

He may be agile, tactful, versatile salesman but the extent of his success is resting heavily on the colourful back-ground created by the advertising. Salesmanship without advertising is like a song without music or a whisky without water. Advertising creates stage for him for his acting to stage effects to magnify his performance.

(b) It reduces his burden of job

In case salesman alone is called upon to accept the challenge of selling, it goes much difficult. In absence of advertising, he is forced to play a double role the role of advertising and that of salesmanship both rolled into one.

Advertising provokes public interest, wins the confidence, and promotes conviction. With such ready back­ground, salesman can capitalise easily to sell well. As advertising sells between the calls, the work of salesman is rendered easier and cosier.

(c) It instills self-confidence

The victory of a selling house is conditioned by the nature or quality of sales-force rather than its quantity or number. A sales-force that is self-confident and drive-packed is an asset than the army needing a big push without self-start.

Advertising, by educating sales-force, acts a creative force as it instills self-confidence, initiative and drive in them. Advertising gears the salesmen to the top by making them self- confident and self-starting.

4. Consumers and Advertising

The final aim of all marketing efforts is to satisfy the needs of consumers by transmitting the benefits of productive efficiency to the final users.

Advertising is an essential concomitant of modern marketing mechanism that helps consumers in three ways:

(a) It is a driving-force in decision-making

The present-day complex world of industry has been able to provide with the largest possible varieties of products to such an extent that the consumers are at loss to decide. Further, each producer claims that his own products are the best.

In such situation, it is advertising that comes to the rescue of a consumer to select the best by providing him with comparative account of each in terms of features, prices, utility, quality, durability, convenience and the like, the consumer finds it easy to decide with such ready information.

(b) It ensures better quality products at reasonable prices

Advertising stimulates the sales of a good product and accelerates the destruction of bad product or products by imprinting the image of the product on the minds of the consumers and earn a long standing reputation for the manufacturing house.

It is the work of branding to build the image because; every brand stands for quality, value, guarantee, price and service. This means that a rupee paid has definite value received. Maintenance of quality and price of a product is important not only as an objective but as a bench-mark for quality improvement and price reduction.

(c) It saves good deal of time

The modern gracious living has made the members of the family to put forth their best to make both the ends to meet. In the past, the things were cheaper and the requirements were limited.

Hence, it was enough for a single member to earn the bread for the entire family. However, today’s crazes for too many things and the mounting inflation have made more members of the family to contribute to the family income.

Each one has joined the rat race of earning more where he is racing against the limited time. Today, the people are so busy that they pant for the arrival of Sunday to have badly needed rest.

For such people, advertising is a great time- saver. Advertising saves time in the sense that it sells the goods and services well in advance. That is, through the ads, people know about products and services they are to only contact the selling outlets to get them.

5. Society and Advertising:

Advertising is both a business and social force and institution. As a business and social process, it affects every-one in the society.

The society stands to benefit as under:

(a) It uplifts the living standards

Advertising nourishes the consumer power and creates wants for better standard of living. Standard of living depends on the national income and its distribution on one hand and the consumption pattern on the other hand with relevance to disposable income.

Advertising gives kick to the consumption pattern making them to buy more and more; this results in more, better and cheaper production; increased production means more employment and more earnings and, therefore, more spending. Thus, more, better and cheaper production will be in the easy reach of people with low income packets even enabling them to enjoy higher standard of living.

(b) It generates gainful employment opportunities

Advertising is capable of generating gainful employment opportunities directly and indirectly for those who have talent and courage. Direct employment opportunities are wide open in the varied branches of the every growing field of advertising.

It is highly specialised and challenging area requiring the services of talented people like artists, painters, photographers, message writers, singers, campers, musicians, carpenters, press men, actors and actresses, technicians, agents and executives too.

It is these persons who handle the meticulous and delicate tasks. Indirectly, it has given employment by supporting all those industries that supply input to these advertising activities such as paper paints, colours and dyes, electric, electronic, steel and other metal industries. This employment generation is of special importance to the developing countries like India.

(c) It provides new horizons of knowledge

Advertising is a great educator. It is a form of education. Every advertiser has something to share with the society. Thus, employer speaks of job vacancies and an idle candidate solicits job; parents hunt brides and bride-grooms; some announces the arrival of a baby while others the departure of old; producers speak of their products, service or the idea that they propose to sell.

Each ad is a piece of information and has a theme behind. To convey the theme, the advertising copy tells a story, gives a statistical profile, narrates a history, gives enchanting illustrations that we have never heard and seen. Thus, it is educator and entertainer.

(d) It up-holds the culture of a nation

Culture is man-made environment in which he lives along with others. It stands for the values of life and living. These values are subject to change and are guided by the dynamics of social, political, economic and ethical dimensions.

The cultural function of advertising is to understand, reflex and accept the value structure of society well before it vanishes. Advertising, within the limits, set by the culture, is to create new expectation for the consumers.

Advertising, while a central component of the global economy and a key tool for businesses to promote their products and services, faces various criticisms related to its methods, ethics, and effects on society.

• Promotion of Unhealthy Lifestyles

Many advertisements, particularly those for junk food, alcohol, and tobacco, are criticized for promoting unhealthy lifestyles. Critics argue that these ads contribute to health issues like obesity, alcoholism, and smoking-related diseases by glamorizing the consumption of these products.

• Exploitation of Children

Advertising targeted at children is a significant area of concern. Critics argue that children are particularly vulnerable to advertising because they lack the critical thinking skills to understand the persuasive intent of ads. This can lead to unhealthy eating habits, materialism, and pestering parents to buy unnecessary products.

• Perpetuating Stereotypes

Advertisements often rely on and reinforce stereotypes, including those related to gender, race, and social class. This can perpetuate harmful biases and discrimination in society. For example, women are frequently depicted in domestic roles, while men are shown in positions of power.

• Creating Unrealistic Expectations

Many ads create unrealistic expectations about products, lifestyles, and body images. This can lead to dissatisfaction, self-esteem issues, and a constant pursuit of an unattainable ideal. The use of photoshop and other editing tools to enhance images further exacerbates this problem.

• Encouraging Materialism

Advertising is criticized for fostering a culture of materialism, where success and happiness are equated with the acquisition of material goods. This can lead to overconsumption, debt, and a focus on external validation rather than intrinsic values.

• Manipulation and Psychological Tactics

Advertising often employs psychological tactics to influence consumer behavior, leveraging emotions, fears, and desires to persuade consumers to buy. Critics argue that this manipulation is unethical, exploiting human vulnerabilities for commercial gain.

• Environmental Impact

The promotion of constant consumption through advertising contributes to environmental degradation. It encourages a throwaway culture and the overuse of resources, leading to pollution, waste, and the depletion of natural resources.

• Intrusiveness and Information Overload

With the rise of digital advertising, consumers are bombarded with ads across various platforms, leading to information overload and a sense of intrusiveness. This can be annoying and distracting, diminishing the user experience on websites and social media.

• Economic Inequality

High-budget advertising campaigns can create barriers to entry for small businesses, reinforcing the dominance of large corporations. This can lead to reduced competition, higher prices for consumers, and an economy dominated by a few powerful players.

• Privacy Concerns

Targeted advertising, particularly online, raises concerns about privacy and data protection. Advertisers often collect and analyze vast amounts of personal data to target ads more effectively, leading to fears about surveillance and the misuse of personal information.

Addressing the Criticisms

In response to these criticisms, there are growing calls for more ethical advertising practices, including stricter regulations on advertising to children, more transparent and honest advertising, efforts to reduce stereotyping and promote diversity, and a greater focus on sustainability and social responsibility. Many companies are also adopting corporate social responsibility (CSR) initiatives to address these concerns and improve their public image.

Advertising is praised but also criticized by critics in their own ways. Advertising has many positive impacts along with its negative pictures. As the President of American Association of Advertising Agencies, John O’ Toole has described advertise is something else. It is not related to studies, but it educates. It is not a journalist but gives all information. And it is not an entertaining device but entertains everyone.

Social Role of Advertising

There are some positive and some negative aspects of advertising on the social ground. They are as follows.

• Deception in Advertising

The relation between the buyers and sellers is maintained if the buyers are satisfied with what they saw in advertise and what they got after buying that product. If seller shows a false or deceptive image and an exaggerated image of the product in the advertisement, then the relation between the seller and buyers can’t be healthy. These problems can be overcome if the seller keep their ads clean and displays right image of the product.

• The Subliminal Advertising

Capturing the Minds of the consumers is the main intention of these ads. The ads are made in such a way that the consumers don’t even realizes that the ad has made an impact on their minds and this results in buying the product which they don’t even need. But “All ads don’t impress all consumers at all times”, because majority of consumers buy products on basis of the price and needs.

• Effect on Our Value System

The advertisers use puffing tactics, endorsements from celebrities, and play emotionally, which makes ads so powerful that the consumers like helpless preys buy those products.

These ads make poor people buy products which they can’t afford, people picking up bad habits like smoking and drinking, and buy products just because their favorite actor endorsed that product. This affects in increased the cost of whole society and loss of values of our own selves.

• Offensiveness

Some ads are so offensive that they are not acceptable by the buyers. For example, the ads of denim jeans showed girls wearing very less clothes and making a sex appeal. These kinds of ads are irrelevant to the actual product. Btu then there is some ads which are educative also and now accepted by people. Earlier ads giving information about birth control pills was considered offensive but now the same ads are considered educative and important.

But at the last, there are some great positive aspects which help

• Development of society and growth of technologies
• Employment
• Gives choices to buyers with self interest
• Welcomes healthy competition
• Improving standard of living.
• Give information on social, economical and health issues.

Economic role of Advertising

• Value of Products

The advertised products are not always the best products in the market. There are some unadvertised products also present which are good enough. But advertising helps increase value for the products by showing the positive image of the product which in turn helps convincing customers to buy it. Advertising educates consumers about the uses of the products hence increasing its value in minds of the consumers. For e.g. mobile phones were first considered as necessity but nowadays the cell phones come with number of features which makes them mode of convenience for consumers.

• Effect on Prices

Some advertised products do cost more than unadvertised products but the vice versa is also true. But if there is more competition in the market for those products, the prices have to come down, for e.g., canned juices from various brands. Thus some professional like chartered accountants and doctors are not allowed to advertise.

But some products do not advertise much, and they don’t need much of it and even their prices are high but they are still the leaders in market as they have their brand name. e.g., Porsche cars

• Effect on Consumer demand and choices

Even if the product is heavily advertised, it does not mean that the demand or say consumption rates will also increase. The product has to be different with better quality, and more variety than others. For E.g., Kellogg’s cornflakes have variety of flavors with different ranges to offer for different age groups and now also for people who want to loose weight thus giving consumers different choices to select from.

• Effect on business cycle

Advertising no doubt helps in employing more number of people. It increases the pay rolls of people working in this field. It helps collecting more revenues for sellers which they use for betterment of product and services. But there are some bad effects of advertisements on business cycle also. Sometimes, consumer may find the foreign product better than going for the national brand. This will definitely effect the production which may in turn affect the GDP of the country.

The economic aspects are supported by the Abundance Principle which says producing more products and services than the consumption rate which helps firstly keeping consumers informed about the options they have and secondly helps sellers for playing in healthy and competitive atmosphere with their self interest.

An advertising budget is an estimate of a company’s promotional expenditures over a certain time period. More importantly, it is the money a company is willing to set aside to accomplish its marketing objectives. When creating an advertising budget, a company must weigh the value of spending an advertising dollar against the value of that dollar as recognized revenue.

Advertising budgets are often thought of as huge expenditures with vague returns. Firms think about the size or the bigness of the money spent and not quiet often is the effectiveness of the spending taken into consideration. Managers see the Advertising expenses as cutting into profits. But advertising budget should not be considered as expenditure but as an investment which if done properly can give real good returns.

Advertising is an important tool in the hands of marketers and many companies depend on it for their sales to happen and get profits. There are many Indian companies who spend millions on advertising. But then because of difference of opinion on its importance, the budget setting is arbitrary. Many a times the objectives of advertising take a back seat when budgets are finalised.

But one must realize that an adequate amount of advertising input is very necessary, not only to get a good brand image but also to increase profits through sales. Many a times advertisers or companies complain that they have to make the advertisement expenditure because their competitors are doing so. Now the importance of advertising has already been discussed. Here in this article we will familiarize the reader with various planning and operational aspects of advertisement.

Objective setting is a very important step and more importantly is influenced by the limitations of the budget. Irrespective of the size of the company, budget decisions are critical as the money spent on advertising may mean the difference between success and failure. So when in doldrums a company should think of some other more rational and practical way outs rather than cutting down the advertisement and other promotional budgets.

The advertising budget decision is not a one-time responsibility because every year the firms have to formulate new objectives keeping pace with ever dynamic and changing market situations. So new budget has to be formulated every year, each time a new product is introduced, or when either internal or external factors necessitate a change to maintain competitiveness. In this chapter we will study this aspect in detail. We will see how to fix up the budget through proper decision-making and how can this be optimized.

While planning for the advertisement Budget we seek answers to the following questions:

• How much would be the advertising input in order to achieve agreed marketing objectives?
• How much would be the amount of money one can afford to spend on advertising and still achieve the agreed profit objective?
• How much would be the apportionment of the total advertisement expenses on each individual product or product group?
• How much would be the advertising budget allocation on new products?

Deciding on the advertising budget

There are 5 specific factors to consider when setting the advertising budget

1. Stages in the life cycle

Advertisement requirements are different for different product life cycle stages as shown below:

(a) Introduction stage: New products typically receive large advertising budgets to build awareness for early adopters and trade

(b) Growth stage: The consumer awareness spread in mass market helps to generate consumer trial and further sales

(c) Maturity stage: At this stage advertisements must create differentiations in brand positioning through different perspectives such as benefits, applications, price etc. Established brands usually are supported with lower advertising budgets as a ratio of sales.

(d) Decline stage: At this stage, the budget must be reduced to the level needed to retain loyal customers only.

2. Market share and consumer base

The products, which are having high market share usually require low expenditures as a percentage of sales to maintain share. Building market share by increasing market size requires large expenditures, on a cost per impression basis. It is less expensive to reach consumers of a widely used brand than to reach consumers of low share brands.

3. Competition and clutter

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

4. Advertising frequency

The number of repetitions needed to put across the brand’s message to consumers has an important impact on the advertising budget.

5. Product substitutability

Brands in a commodity class such as cigarettes, soft drinks and liquor require heavy advertising to establish a differential image. Advertising is also important when a brand can offer unique physical benefits or features.

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. Reevaluate 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.

According to John J Burnett, this budget setting method is particularly well suited to new product introduction when advertising must be developed more or less from scratch. Although it is difficult to implement this method, it is still fairly popular among large companies.

The major difficulty that confronts planners is to determine which are those specific tasks required and the costs associated with each. For instance, if the objective is to accomplish an awareness level of 60% among the target audience, what specifically are those tasks that need to be performed to achieve this level of awareness? How much will it cost to perform these tasks? It is difficult to know precisely what is required. Past experience, though, serves as a good guide in case of existing products.

Moreover it is not always possible to know exactly what are the specific tasks required for achieving the set objectives and how much it will cost to complete the job. This process is easier in case of an existing product or a similar product in the same product category. But it is especially difficult for new product introductions. Hence because of these disadvantages, many marketing managers use top- down approaches for setting the total expenditure amount.

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.

Managers are always curious to find out how much money is to be invested in advertising and for how long, before the brand gets established. How accurately a payout plan can be developed depends on the accuracy of sales forecasts over time, factors that affect the market and estimated casts.

Advertising expenditures during the year of brand introduction will be high so as to stimulate the movement of the target audience through various stages finally leading to purchase. At this stage growth in sales can be expected to be slow and the company would lose money.

The brand reaches break-even in the next few coming years (may be 2nd or third year) and then starts showing substantial profits. It cannot account far all the uncontrollable factors such as competition, new technologies, changes in government policies and other factors that may influence the plan. Payout planning method is not popular among companies

The payout plan is not always perfect however it guides the manager in establishing the budget. A combination and joint use of this method and the objective and task method, is a much more logical approach to budget setting than the top-down approaches previously discussed.

On the contrary several studies have shown that it does not have a wide acceptance in the industry. Moreover it cannot account for all the uncontrollable factors such as competition, new technologies, changes in government policies and other factors that may influence the plan.

Advertising is an essential expense for any company. Determining how much you need to spend on a yearly basis can be difficult, particularly if you have a new company or you are exploring new advertising avenues. There are several means to determine how much money you should be spending on your ad budget. Keep in mind that as your advertising becomes more effective and more revenue is produced, you may need to revisit your budget to continue to foster growth within your company.

When you are a small or regional business, how do you know how much to spend on advertising?  Spending too little on your advertising plan is just as bad as spending too much.  A yearly budget must be determined, but should also be evaluated quarterly to make sure dollars are spent at the right time or around the right promotion.  At Media Venue, we counsel our clients on how to set an effective advertising budget based on the goals and objectives for their business.  Here are our 5 guidelines for budget setting.

Preparation of advertising budget

1. Review competitor spend

If your competition is spending a lot of money or your business category has a lot business category has a lot of competition, your advertising budget may need to be higher to break through the clutter.  If your budget is smaller, use the media that gives you the best bang for your buck.  If you can’t do it all, own one medium that will make the most significant impact.

2. Allocating a % of sales toward your advertising budget

An established business with consistent profits can set an advertising budget by a % of sales.  For instance, a small business with $500K in sales from 2016, could allocate anywhere between 5 and 15% to advertising in 2017. However, this amount would also be dependent on the business category, market(s), specific media cost, time of year (is placing advertising more seasonally), etc.

3. Set a Goal or Objective

Do you want to increase the overall traffic to your business? Do you want to grow your sales by 2%? Goals and objectives can require different media spend to accomplish. Be aware of what you are trying to accomplish and be realistic based on the amount of money you are going to allocate. It’s hard to grow your business by 10%, if your advertising budget is the same or less than the year before.

4. Know your limits

Know your max budget for the year and then allocate the dollars by month or quarter.  Media in the 4th quarter is typically more expensive than in the 1st quarter.  So if you are advertising all year, negotiate a better price in quarter 1 to allow more money for quarter 4.

5. Track Results

Are you tracking what dollars you are spending each month vs. what media you are buying?  There are ways to reach the consumer and get a good gauge on if your advertising is working:  promo code, “bring in this ad”, “say you heard us on WGG radio station”, etc.

How to Set an Advertising Budget?

1. Find out where and how your competitors are advertising. If you want to remain competitive within your industry, quite often your competitors will determine how much you spend on your advertising budget. See if they are using print, radio, Internet and direct mail, and then gauge how much money they are spending.
2. Set a fixed-price advertising budget if your business is established. Many companies find it easier to take a set portion of their sales revenue, typically between 2 and 5 percent, and put it aside for future advertising. If your company is new and does not yet have a strong revenue stream, avoid this method.
3. Use an objective-based method. This requires setting an objective for example, increasing your online customers by 10 percent and figuring out how much revenue it will bring in and the costs necessary to find and market to these consumers. This method is typically utilized by startups and companies who do not have enough revenue to support a large advertising budget.
4. Set a maximum amount that you wish to spend. This is a hit-or-miss method, but it will work for companies that have solid cash flow and/or reserves from which to draw. In this situation, decide on a total amount and then portion it out accordingly, such as “X” amount for print, “X” amount for Internet, etc.
5. Explore new avenues to determine effectiveness. To help determine how much money to spend on an ad campaign, test the waters before diving in. Pay-per-click and results-based marketing are prime examples of this technique. Set a small initial budget for advertising and then increase it as necessary.

There are several allocation methods used in developing advertising budget. The most common are listed below:

• Percentage of Sales method
• Objective and Task method
• Competitive Parity method
• Market Share method
• Unit Sales method
• All Available Funds method
• Affordable method

It is important to notice that most of these methods are often combined in any number of ways, depending on the situation. Because of this, these methods should not be seen as rigid, but rather as building blocks that can be combined, modified, or discarded as necessary. Remember, a business must be flexible—ready to change course, goals, and philosophy when the market and the consumer demand such a change.

1. Percentage of Sales Method

Due to its simplicity, the percentage of sales method is the most commonly used by small businesses. When using this method an advertiser takes a percentage of either past or anticipated sales and allocates that percentage of the overall budget to advertising. Critics of this method, though, charge that using past sales for figuring the advertising budget is too conservative and that it can stunt growth. However, it might be safer for a small business to use this method if the ownership feels that future returns cannot be safely anticipated. On the other hand, an established business, with well-established profit trends, will tend to use anticipated sales when figuring advertising expenditures. This method can be especially effective if the business compares its sales with those of the competition (if available) when figuring its budget.

2. Objective and Task Method

Because of the importance of objectives in business, the task and objective method is considered by many to make the most sense, and is therefore used by most large businesses. The benefit of this method is that it allows the advertiser to correlate advertising expenditures to overall marketing objectives. This correlation is important because it keeps spending focused on primary business goals.

With this method, a business needs to first establish concrete marketing objectives, which are often articulated in the “selling proposal,” and then develop complimentary advertising objectives, which are articulated in the “positioning statement.” After these objectives have been established, the advertiser determines how much it will cost to meet them. Of course, fiscal realities need to be figured into this methodology as well. Some objectives (expansion of area market share by 15 percent within a year, for instance) may only be reachable through advertising expenditures that are beyond the capacity of a small business. In such cases, small business owners must scale down their objectives so that they reflect the financial situation under which they are operating.

3. Competitive Parity Method

While keeping one’s own objectives in mind, it is often useful for a business to compare its advertising spending with that of its competitors. The theory here is that if a business is aware of how much its competitors are spending to inform, persuade, and remind (the three general aims of advertising) the consumer of their products and services, then that business can, in order to remain competitive, either spend more, the same, or less on its own advertising. However, as Alexander Hiam and Charles D. Schewe suggested in The Portable MBA in Marketing , a business should not assume that its competitors have similar or even comparable objectives. While it is important for small businesses to maintain an awareness of the competition’s health and guiding philosophies, it is not always advisable to follow a competitor’s course.

4. Market Share Method

Similar to competitive parity, the market share method bases its budgeting strategy on external market trends. With this method a business equates its market share with its advertising expenditures. Critics of this method contend that companies that use market share numbers to arrive at an advertising budget are ultimately predicating their advertising on an arbitrary guideline that does not adequately reflect future goals.

5. Unit Sales Method

This method takes the cost of advertising an individual item and multiplies it by the number of units the advertiser wishes to sell.

6. All Available Funds Method

This aggressive method involves the allocation of all available profits to advertising purposes. This can be risky for a business of any size, for it means that no money is being used to help the business grow in other ways (purchasing new technologies, expanding the work force, etc.). Yet this aggressive approach is sometimes useful when a start-up business is trying to increase consumer awareness of its products or services. However, a business using this approach needs to make sure that its advertising strategy is an effective one, and that funds which could help the business expand are not being wasted.

7. Affordable Method

With this method, advertisers base their budgets on what they can afford. Of course, arriving at a conclusion about what a small business can afford in the realm of advertising is often a difficult task, one that needs to incorporate overall objectives and goals, competition, presence in the market, unit sales, sales trends, operating costs, and other factors.

An advertising agency is a specialized service firm that assists companies in planning, creating, and managing advertising and other forms of promotion. It offers expertise in market research, strategy development, creative design, media planning, and buying, aiming to boost brand awareness and drive sales through targeted advertising campaigns.

Advertising agency compensation refers to the payment structure agreed upon between a client and an advertising agency for the services rendered. This compensation can take several forms, reflecting the nature of the work, the complexity of tasks, and the agency’s involvement in the client’s projects. Common models:

Fee-Based:

Fixed fee is agreed upon for services over a specified period, often used for project-based work or ongoing services.

• Strategy:

The client pays the agency a set fee for its services, which can be billed as a flat fee for a project, an hourly rate, or a monthly retainer.

• Use Case:

Suitable for project-based work or when the scope of services is well-defined.

Commission:

The agency earns a commission, typically a percentage, from the media purchases made on behalf of the client. This model is traditional but less common now.

• Strategy:

The agency earns a commission, usually a fixed percentage, from media buys or other advertising expenditures made on behalf of the client.

• Use Case:

Commonly used in traditional advertising settings but less frequent now due to the complexity of digital media.

Retainer:

The client pays a set amount regularly (e.g., monthly) for an agreed-upon range of services, providing a stable income for the agency and ongoing support for the client.

• Strategy:

The client pays a recurring fee, typically monthly, for an agreed-upon basket of services, ensuring the agency’s availability and ongoing support.

• Use Case:

Best for long-term relationships where the agency acts as an extension of the client’s marketing team.

Performance-Based:

Compensation is tied to the achievement of specific results or KPIs, aligning the agency’s incentives with the client’s goals.

• Strategy:

The agency’s compensation is tied to the achievement of specific performance metrics, such as sales targets, lead generation numbers, or other key performance indicators (KPIs).

• Use Case:

Ideal for clients focused on measurable results and looking to align the agency’s incentives with their business goals.

Hybrid:

A combination of the above models, tailored to suit the specific needs and preferences of both the client and the agency.

• Strategy:

A combination of the above methods, tailored to the needs of both the client and the agency.

• Use Case:

Offers flexibility and can be adjusted based on campaign success, ensuring fair compensation for the agency and accountability towards achieving client objectives.

Value-Based Compensation

• Strategy:

Fees are based on the value or impact the agency’s work has on the client’s business, rather than on hours worked or media spend.

• Use Case:

Suitable for high-stakes campaigns where the agency’s work can significantly affect the client’s bottom line.

Small businesses use the terms “advertising,” “sales,” “marketing” and “promotions” to refer to their overall selling activities, even though each has a different meaning. Advertising is a specific marketing communication activity that falls under the “promotion” element of the classic marketing mix also known as the Four Ps of product, price, place and promotion. Sales is a broader function that’s involved in all four elements of the marketing mix.

The Marketing Mix

Selling a product or service requires a coordinated effort that takes into account four key marketing areas. You first develop the right product for a specific target audience, using research that can include focus groups, customer surveys and an analysis of your competition. After you know the benefits customers want and you create the optimal product for them, you price your product or service to create the best combination of sales volume and profit margin. The “place” aspect of the marketing mix refers to how and where you distribute what you sell, which can include a retail store, online shopping, catalogs or wholesalers and distributors. The final part of the marketing mix concerns how you promote your product and includes advertising, public relations, social media campaigns, sponsorships and sales promotions. Sales promotions include such marketing tools as rebates, coupons, temporary discounts and buy-one-get-one-free deals.

Advertising

Advertising is one form of promotion and includes paid messaging. Unlike public relations, which attempts to get newspapers, magazines, broadcasts and websites to talk about your company without paying a fee, advertising lets you control your message by purchasing print space, air time, website banners or outdoor signs with a message you create and display. Even if you have a limited budget, it’s a good idea to divide your promotional efforts into advertising, PR, sponsorship and sales promotions activities.

Sales

The word “sales” has different meanings for different businesses and refers to the broad spectrum of planning and personal customer-contact activities you use to generate purchases of your product or service. Sales planning activities span all four elements of the marketing mix, and sales managers should be involved in product development, pricing strategy decisions, distribution discussions and promotional activities. Customer-contact sales activities include tactics such as selling over the phone or in person, direct mail solicitations and customer service. These are both promotional and distribution activities because they not only require salesmanship but also include methods of delivering product to the marketplace. When you use the word “sales” to refer to temporary discounts, one-time liquidations or short-term markdowns on products or services, that falls under the promotions element of the marketing mix.

Interrelationships

As your company grows and you assign different people to work on different areas of marketing, such as your online sales pages, print ads, press releases, distribution channels and pricing strategies, bring all your marketing staff members and contractors together to make sure your efforts support one another and avoid clashes. For example, if your website shows that you are an upscale product or service provider, but your advertising staff is running buy-one-get-one-free or senior-discount coupons in local print publications, the conflicting message can damage your brand. Your sales staff needs to know the prices, sale dates, warranties, benefits and other offerings that will appear in your ads before they run. This prevents sales people from making statements on the phone that your advertising later contradicts.