Agency Budgeting 2/16/2012
Agency Fees Example John, an entry-level account coordinator’s billable rate is $125. He spends 3 hours writing a press release. What is the agency fee for the press release?
Another Example • John, an entry-level account coordinator’s billable rate is $125. He spends 3 hours writing a press release. • His manager, Sarah, spends 1.5 hours editing the press release and her billable rate is $175. What is are the agency fees for this press release?
Agency Fee Example #2 John’s Billable Fees Sarah’s Billable Fees
OOP Expenses • Out of pocket expenses are things such as printing, shipping, data charges, and travel that are incurred by the agency in order to complete the work. • OOPs expenses are usually agreed upon in advance and billed at-cost. This means the agency shouldn’t make a profit off of OOP expenses.
One Final Example • John, an entry-level account coordinator’s billable rate is $125. He spends 3 hours writing a press release. • His manager, Sarah, spends 1.5 hours editing the press release and her billable rate is $175. • Their agency puts the press release on “the wire.” This costs $625 and is categorized as an OOP expense.
Agency Fee Example #2 John’s Billable Fees Sarah’s Billable Fees OOP Expenses
Advertising Budgeting Professor Close Sources: Cravens and Percy(1998); Murphy, Cunningham and de Lewis (2011)
We will discuss these topics of Advertising Budgeting: • Why Crucial • 2. The 3 Budgeting Methods • 3. Trends in Ad Budgeting • *Note, please refer to advertising as INVESTING, not spending, in our class and in your briefs… • why do I say that?
1. Budget is Crucial to Ad Strategy Target Audience Advertising Objectives ****Advertising Budget**** Creative Strategy Advertising Media and Programming Schedules Implement and Evaluate Strategy Effectiveness
So, Why is ad or IBP budgeting crucial? • Frankly, a company’s success is a function of its growth in sales and profits • What fuels that growth? ADVERTISING and MARKETING • This, in turn, sparks WOM (and this can be free!) • The economy has ups and downs, as do specific industries (Note: the soft drink industry dropped 4% in 2008 when our economy started hurting—so Pepsi invested $1.2 BILLION 2008-2011 in a marketing overhaul) • THINK…..Is this common sense? Would you advertise more, status quo, or less when times are tough?
Tough Times? So, Re-Allocate to lesser Investments Which are relatively smaller investments? New Media Direct Marketing Advertising: TV, Radio, Outdoor, Print WOM$ Personal Selling Sales Promotion Event Marketing Public Relations
Your CEO asks you to propose an ad budget.How would you calculate the ad budget?Why would you pick this method?
2. Three Ad/IBP Budget Methods (I don’t even want to mention the 4th…) Budgeting Method #1a~The Percentage of Past Sales Method A2 = ƒ (S1) Where: A2 is the total ad budget for NEXT year (year 2 or quarter 2) ƒis a percentage figure (see NAA industry norms) S1 is sales for period 1 (or last year’s sales)
Budgeting Method #1b~The Percentage of Forecasted Future Sales Method A2 = ƒ (S2) Where: A2 is the total ad budget for NEXT year (year 2 or quarter 2) ƒ is a percentage figure (see NAA industry norms) S1 is sales for period 1 (or last year’s sales)
Budgeting Method #1~Percentage of Sales Features Drawbacks • Fixed percent of sales, often based on past expenditure patterns. • Relatively simple (if you have the information) • You must calculate ad allocations as a fixed percentage of PAST SALES • (e.g., last years’ sales) • Can help with franchising. • Note: Peckham’s Formula: for new products, set S.O.V. @ 1.5 times your desired market share two years out • Arbitrary. • Budget may be too high when sales are high. • Budget may be too low when sales are low. • Ignores long-term effects • You need benchmarks. • You need advertising to sales ratios for the industry (note these are computed each year by pro. Ad organizations) • Industries vary a lot (e.g., malt beverages invest 10% of annual sales on advertising; movie theatres are closer to just 1% industry average) • Note: about 3% is an average ad 2 sales ratio
Budgeting Method #2~Competitive-Parity Method (I call it the market share approach…) ASV = (AF) ______ Ac + AF Where: ASV is the firm’s advertising share of voice (S.O.V) (anyone care to remind us what S.O.V is?) AF is the firm’s advertising expenditures for the period in question Ac is all competitors’ advertising expenditures for the period in question At least, think about a competitive analysis
LV *At constant rate of exchange **Gucci division of Gucci Group Data: Company reports. BW LV increased advertising 20% in 2003―spends just 5% of revenues on advertising―half the industry average Cravens and Percy 1998 cited *Business Week, March 22, 2004, 98-102.
Budgeting Method #2 ~Competitive-Parity Features Drawbacks
Budgeting Method #3~ Objective and Task A = ƒ (objectives) Where: A is advertising investment (the firm’s advertising expenditures for the period in question) Objectives are things that you want to achieve in said time period (awareness, trial use, etc.)
Link Objectives to Budget • Need Recognition • Finding Buyers • Brand Building • Evaluation of Alternatives • Decision to Purchase • Customer Retention • …Others?
Budgeting Method #3~ Objective and Task Features Drawbacks
Budgeting Method Recap (Cravens and Percy and Murphy, Cunningham and de Lewis) Features Drawbacks Percentage of Sales • Arbitrary. • Budget may be too high when sales are high • Budget may be too low when sales are low. Comparative- Parity • Differences in marketing strategy may require different budget levels. Objective and Task • The major issue in using this method is deciding the right objectives so measurement of results is important. Percentage of Sales • Fixed percent of sales, often based on past expenditure patterns. • Can help with franchising. Comparative- Parity • Budget is based largelyupon what competition is doing. Objective and Task • Set objectives and then determine tasks (and costs) necessary to meet the objectives.
Whichever method, budgets vary due to: • Target Market(s) • Desired Positioning • Role of Promotion in Positioning • Product Characteristics • Stage of Life Cycle • Situation Specific Factors (examples?)
Which ad or IBP budget method is generally a best bet? Objective and Task All You Can Afford (note: this is not a good idea usually… Proceed with caution. Percent of Sales (note: Future or past) Budgeting Methods Competitive-Parity
Ad/IBP Budgeting I would argue for Objective and Task, because of the logic and the strategic approach with long-term appropriation and flexibility. Budget Allocation Media/ Scheduling Creative Strategy
3. Recent Trends in Ad/IBP Budgeting Decisions • More Promotions/Less Ads • International Markets mean more competition and harder to measure market share • Clutter. Clutter. Clutter. • Signaling Theory • Short-term pressure to brand managers • Less umbrella branding strategy (more narrow) • Advocacy ads • CSR movement • Green movement • Online ads a 25$ BILLION a year industry (young, mobile, and measurable) • Experiential/Event Marketing gaining prominence
$600 $400 $200 0 Approx. Annual Expenditures (billions) Personal Selling Sales Promotion Event Marketing Advertising