Budget setting must be a process of maximizing the effect on the brand's profit of marginal increases and decreases in money spent on advertising.

The A&P budget is always fixed in advance. Profit drops when: a) spending goes up and sales remain at original target level or b) the sales fall below and spending is maintained. Therefore, the biggest trade-off of all is between A&P and profit.

For the past twenty years, promotions have done better than advertising at the expense of the manufacturers' earnings, but for the benefit of the customers (lower prices).

The division between advertising and promotions can vary from year to year and there is a tendency for overall A&P expenditure to grow gradually.

Manufacturers generally use the "case rate" system, which means a certain number of cents or dollars of advertising for each case of the brand sold. There are variations, but they all come down to the same question of "How much can I afford to spend?" Advertising is the only purchase that makes the manufacturer ask itself what it can afford vs. what it needs to spend to get the job done.

Although most advertisers use this method, its weakness is that it is based on the internal cost structure of the brand instead of focusing on the marketplace (what the brand's sales ultimately depend on) to determine how much money is needed to influence consumer behavior.

Most people choose to use this system because its simplicity is tempting, but the best way to determine a brand's budget is to judge the facts, to decide which inputs are most important from the marketplace and find a way to compromise these with what the brand can afford to spend without getting into trouble. Thinking about the long-term profit vs. the short-term profit would be a good idea.

Three factors advertisers should look at when deciding money to spend on advertising:

- measuring the influence of competition in a non-emotional and objective way

- how brands in the market in the past have reacted to different levels of advertising

- the use of hard data on the above mentioned response


A Rational View of the Competition

- Find out what is normal for a big brand to spend vs. a small one?

- 1st method: How much of a percentage of the net sales value is the brand's spending on advertising?

- 2nd method: comparing the brand's share of market (SOM) with the brand's share of voice (SOV)


Most companies will choose starting over with a fresh new idea than learning from the past or being influenced by it. Unfortunately, looking at the history would allow brand managers to know exactly what mistakes not to make and those who are mature and prudent could use that information to make a more informed decision about the advertising budget.

Econometrics is used to measure the contributions to the brand's sales by various causes including: advertising, each of the other sales stimuli (coupons, trade promotions, etc), the brand's equity (the base sales w/o advertising and promotions. Multivariate regression is used to find this out.

For the most part, the higher the advertising elasticity, the more likely increased advertising weight will make a good profit.

Something to keep in mind is the goal: maintenance or sharp growth. After finding out how the figure can be adjusted based on the brand's advertising elasticity, reasonability is checked with historical records. After checking all this, an external figure is concluded upon based on the market. The brand's budget has probably been based on the "case rate" system and when it is applied to the coming year's projected sales, the internal estimate is figured out based on the cost structure of the brand. Now both must be balanced. If they are equal (rare), there are no problems in setting the budget.

If the internal is larger than the external, there is more money available to spend past what we need, but they have to be careful that there weren't any costs that went undetected. A suggestion would be to concentrate the advertising in a few substantial regions for at least a year to see how it is received compared to the competition. If the perception is positive, then advertise in the rest of the nation, but if not, the advertising can be withdrawn and not a horrible amount of money will have been wasted.

If the external is larger than the internal, the best thing would be to make a fresh start and plan the progress of the brand for at least three years. The first year may not be as profitable, but the second and third should make up for that, being more profitable overall in the long-term.