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Belch: Advertising and
Promotion, Sixth Edition
IV. Objectives and
Budgeting for Integrated
Marketing
Communications Programs
7. Establishing Objectives
and Budgeting for the
Promotional Program
is strong evidence that exactly the opposite should occur,
as Exhibit 7-10 argues. Moreover, the decision is not a
one-time responsibility. A new budget is formulated
every year, each time a new product is introduced, or
when either internal or external factors necessitate a
change to maintain competitiveness.
While it is one of the most critical decisions, budgeting
has perhaps been the most resistant to change. A comparison
of advertising and promotional texts over the past
10 years would reveal the same methods for establishing
budgets. The theoretical basis for this process remains
rooted in economic theory and marginal analysis.
(Advertisers also use an approach based on contribution
margin—the difference between the total revenue generated
by a brand and its total variable costs. But, as Robert
Steiner says, marginal analysis and contribution margin
are essentially synonymous terms.) 27 We begin our discussion
of budgeting with an examination of these theoretical
approaches.
Theoretical Issues in Budget Setting Most
of the models used to establish advertising budgets can be
categorized as taking an economic or a sales response
perspective.
Marginal Analysis Figure 7-9 graphically represents
the concept of marginal analysis. As advertising/promotional
expenditures increase, sales and gross margins also
increase to a point, but then they level off. Profits are
shown to be a result of the gross margin minus advertising
expenditures. Using this theory to establish its budget, a
firm would continue to spend advertising/promotional dollars
as long as the marginal revenues created by these expenditures exceeded the incremental
advertising/promotional costs. As shown on the graph, the optimal expenditure
level is the point where marginal costs equal the marginal revenues they generate (point
A). If the sum of the advertising/promotional expenditures exceeded the revenues they
generated, one would conclude the appropriations were too high and scale down the
budget. If revenues were higher, a higher budget might be in order. (We will see later in
this chapter that this approach can also be applied to the allocation decision.)
While marginal analysis seems logical intuitively, certain weaknesses limit its usefulness.
These weaknesses include the assumptions that (1) sales are a direct result of
advertising and promotional expenditures and this effect can be measured and (2)
advertising and promotion are solely responsible for sales. Let us examine each of
these assumptions in more detail.
Fixed
cost of
advertising
Sales ($)
Advertising/
promotions ($)
A
f(A) = Sales
A = Advertising/promotions
expenditures
Mf(A) = Gross margin
P = Mf(A) – A = Profit
© The McGraw−Hill
Companies, 2003
Exhibit 7-10 The AAAA
promotes the continued use
of advertising in a recession
Figure 7-9 Marginal
analysis
213
Chapter Seven Establishing Objectives and Budgeting for the Promotional Program