By: Amy Stokes, PhD
Everybody likes to talk about the fun and creative part of advertising, but nobody wants to talk about paying for it. Advertising is one of those budget items that can easily be placed at the bottom of the priority list because the line from payment to profitability is not always a straight one. It is sometimes hard to quantify the impact advertising is having on your bottom line, therefore it can be difficult to justify the expense. However, just because calculating your advertising ROI is not a straight-forward formula, does not mean the line item deserves to be placed on the chopping block. In this column I will discuss the most common budgeting techniques and when it is appropriate to use each.
Percentage of Sales: This is the most common method in part because it is the easiest. With this method you simply determine the percentage of gross sales (past or projected) you want to commit to advertising and then use that as your budget for the year. The issue with this method is that it reverses the true function of advertising. If advertising drives sales, as I would certainly argue it does when done properly, you should have advertising drive gross sales rather than the other way around. The worst time to have this budgetary method in place is during a downturn in sales. When sales dip, businesses utilizing this method will also decrease their advertising budget, which in turn will lead to another year of declining sales, with another subsequent decrease in the advertising budget. This downward cycle can continue until drastic measures are taken to correct the budget to reflect the nature and purpose of advertising: driving sales. The only time I would recommend this method is for a well-established business with steady sales in a relatively fixed industry with high barriers to entry. If you compete in a market landscape that is constantly changing, this method is not advisable.
Objective-and-Task: This budgeting method is the most strategic and usually works best if your business works with an agency or has a marketing department (even if it is just one full-time employee). It requires a deep enough understanding of what advertising can accomplish in a year and then setting your budget accordingly in order to obtain those goals. In order to maintain accountability, it is best to list, in writing, concrete goals that are both quantifiable and measurable. Objectives like increasing the number of unique visitors to your website, entrants into a contest/sweepstakes, social media followers/engagement and event registrations are all examples of quantifiable and measurable outcomes that can be directly linked to paid media buys. Nearly all digital advertising provides comprehensive analytic reports to help you evaluate your spending against desired outcomes so adjustments can be made. There are also helpful ways of making traditional media easier to track. For example, if your business supports multiple phone lines or extensions, listing a unique number in each media vehicle (radio station, newspaper ad, billboard) will allow you to monitor which are worth the money, based on the volume of calls each extension receives. This only works as long as that line is used exclusively for the media that lists it. Unique coupon or promotion codes also work well for tracking.
Competitive Parity: This method requires you to constantly monitor what your competitors are doing and either match or exceed their advertising spending. Using the principles of Share of Voice and Share of Market, it assumes that your ratio of advertising spending relative to the category as a whole (Share of Voice) will determine the ratio of your business’ revenue to total category revenue (Share of Market). In order to increase your market share, you must increase your advertising relative to other brands in the category. If you are a new business entering a market with a few key competitors who advertise heavily, it is unlikely that you will be able to match or exceed their total advertising spend, as it would likely be too large a percentage of your revenue to be feasible. Instead, focus on saturating a niche in the market until you are able to get a foothold. Rather than advertising broadly, narrowly identify a profitable consumer base and make sure your Share of Voice is higher among them. This may require some creative thinking, but can most certainly be done.
This article appears in the October 10th edition of the Springfield News-leader and can be accessed online here.
Amy Stokes, Ph.D. is an assistant professor of marketing at Missouri State University and has experience as a media coordinator in private industry. Stokes has a specialty in advertising and media issues and writes about those areas as well as general consumer behavior. Email: amystokes@missouristate.edu.