Agency Budgeting

2/16/2012

Parts of an Agency Budget

Agency Fees

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?

Agency Fee Example

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 Billa

ble

Fees

Sarah’s Billa

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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 Billa

ble

Fees

Sarah’s Billa

ble

Fees

OOP Expenses

Example Project BudgetActivity Hours Billing Rate Billable Writing Press Release 2 $50 $100 Social Media Monitoring 3 $50 $150 Influencer identification 6 $50 $300 Influencer outreach 4 $50 $200 Event planning 20 $50 $1,000 Time Subtotal $1,750

Out of Pocket Expenses CostT-shirts $500 Twitter Advertising $1,000 Radian6 Data $1,000 OOP Subtotal $2,500

Total $4,250

Advertising Budgeting

Professor Close

Sources: Cravens and Percy(1998); Murphy, Cunningham and de Lewis (2011)

We will discuss these topics of Advertising Budgeting:

1. 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?

WOM$

PublicRelations

Direct Marketing

SalesPromotion

PersonalSelling

Advertising: TV, Radio,

Outdoor, Print

New Media

Tough Times? So,Re-Allocate to lesser Investments

Which are relatively smaller investments?

Event Marketing

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)

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

Features Drawbacks

Budgeting Method #1~Percentage of Sales

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

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.

Brand 2003 Sales Billions

PercentChange*

OperatingMargin

Louis Vuitton $3.80 +16% 45.0%

Prada 1.95 0.0 13.0

Gucci** 1.85 -1.0 27.0

Hermés 1.57 +7.7 25.4

Coach 1.20 +34.0 29.9

*At constant rate of exchange **Gucci division of Gucci Group Data: Company reports. BW

Features Drawbacks

Budgeting Method #2~Competitive-Parity

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?

Features Drawbacks

Budgeting Method #3~ Objective and Task

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.

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.

Features Drawbacks

Budgeting Method Recap (Cravens and Percy and Murphy, Cunningham and de Lewis)

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?

Percent of Sales

(note: Future or past)

Competitive-Parity

Objective and Task

All You Can Afford

(note: this is not a good

idea usually…

Proceed with caution.

Budgeting Methods

Ad/IBP BudgetingI would argue for Objective and Task, because of the logic and the strategic approach with long-

term appropriation and flexibility.

Media/ Scheduling

Creative Strategy

Budget Allocation

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

Approx. Annual Expenditures (billions)

0

$200

$400

$600Personal Selling Sales Promotion

Event MarketingAdvertising