Setting Ad Budgets. The Strategic Approach.Article
1, Sep 2019. 11:34am
“They say that knowledge is power. I used to think so, but I now know that they mean money.” — Lord George Gordon Byron, (1788 – 1824) letter to Douglas Kinnaird
To stay focused on the topic of this White Paper, let’s create a hypothetical that makes the following assumptions: your brand (product, service, company, whatever) is sound and performs well; you have some insight into your target market’s motivations; your creative strategy cleverly differentiates you from competitors based on that insight.
In short, you know exactly What to Say.
Now your problem is budgeting to Say It Effectively.
You want to double your profit margin (how ambitious) and market share (how very ambitious) over the next two years. To achieve this audacious goal, you need to invest – in human capital, in more efficient machinery and/or equipment, in product development, and in advertising.
Some companies, unfortunately, see advertising as damage control, a slap-on addition to their annual budget, or a necessary evil because Competitor A is doing it. To them, advertising is an expense, a drain on the operating budget that might otherwise be devoted more happily to, say, bonuses. Wiser marketers know effective advertising is leveraged – the risk/reward ratio can yield a payoff many times the multiple of, for example, an investment in capital assets.
So our mission is to maximize our return on investment (ROI) by designing a budget plan that will do what every good investment does: make more money. A wise budget turns your risk into a calculated risk, leading to calculated rewards. Where to begin?
First decision: Conservative or Aggressive?
Some brands can and should be aggressive when conditions are right. Some should be conservative. A very conservative approach, like NGNG below, is appropriate when you’re selling commodity goods or services with no demonstrable or even credible advantage over competitors. We also have to ask you how in blazes you’re staying in business, but that’s another issue. Ok, back to our hypothetical – the brand is right, the market is ready, and we have something to say – the perfect recipe to get aggressive. But how?
Option One: The NGNG Approach
No Guts No Glory Budgeting is based on a percentage of revenue, sometimes this year’s actual sales, sometimes (for new products) next year’s projected sales. Multiply that revenue number by your industry’s average ad spending pattern, anywhere from 0.2% (steel foundries) to 18.1% (candy) and many points in between. If, for example, you expect to sell $85 million of laundry detergent, you’d take the detergent industry’s ad spending average (11.3%) and voila! $9,605,000 is your ad budget.
Another easy formula, a close relative, is to take last year’s budget and go a few percent up or down, depending on optimism, pessimism, macroeconomic trends, or the phase of the moon. But if you’ve been seriously under spending on marketing, a 2% change is just tinkering around the margins. Why bother?
If you are poised to be aggressive, these methods are gutless. Stay within the industry average, and you’ll get average results. Great creative will give you some kick, but NGNG budgeting is no way to leave competitors in the dust before they know what hit them. Mimic other companies in your industry and you’ll never break out to the next level.
A small digression: you must take first things first. Aside from all the “givens” we set up in the first paragraph, you must have your distribution in place. For a manufacturer, this may be retailers; for a service, it may be a complete network of sales reps. But – now repeat after me – never try to buy distribution with advertising. We used to say you “cannot” buy distribution with advertising, but of course you can – just not efficiently or cost-effectively. Be conservative with ad spending when distribution is spotty.
Aggressiveness is the antidote for formulaic NGNG mediocrity. Take FedEx, and AFLAC, for examples. Companies in their industries did NOT advertise to consumers until they came along. It was the expected, sensible strategy – what does the general public have to do with business services?
Nevertheless, they both moved aggressively – producing memorable campaigns and running them – on television – in defiance of any precedent or “industry average.” Look at where AFLAC and its competitors are today. Most employees didn’t even know the category existed, and now they demand it, and are highly pleased when they get it. Hey. Go ahead – name another supplemental insurance company.
Like FedEx and AFLAC, you could devastate your competition if conditions are right. This might mean investing more money, but it might just mean investing in unexpected media, or against different market segments. Invest smarter by basing your investments on strategic opportunities that an insightful advisor can help you find.
Option Two: Stomping Out Brush Fires
In this ad hoc method, companies (candidly, many of them retailers) don’t believe they have the money to set aside for a planned, consistent advertising budget, so they wait until a problem arises and decide to fix it.
Picture this: LoserMart executives discover they have a warehouse bulging with hot chocolate-flavored chewing gum. “Clearance Sale-A-Bration!” they shout triumphantly, patting each other on the back. “We have ‘X’ amount of money now, so we’ll use that!” They’ll sell some of that inventory glut, but that shortsighted and reactionary decision process explains why some advertisers invest more in their losers than their winners.
Un-strategic retailers (who eat their young) look at advertising as spending. Their marketing budgets are geared toward promotion, specials, and always always item-and-price, which keeps the focus on the items, and does nothing to enhance the store.
By extreme contrast, visionaries in retailing spend much less on item-and-price, and more on making the store into a brand, so you know what they stand for. The essence of any brand is the promise created in the listener’s head. We don’t have to know the prices of light bulbs when we go to Wal-Mart – we just go there expecting the lowest price. Look at what happens after years of consistent branding: Wal-Mart = lowest prices, Target = cool stuff at a discount, Tiffany’s = prestigious, extravagant quality.
Compare that to the long slow death spiral of K-Mart, which spent years not establishing – or even knowing – what their brand should promise. Target took the high road, Wal-Mart took the low road, and K-Mart wasted tens of millions of dollars budgeting for item-and-price irrelevant messages. Of course, the K-Mart management geniuses never invested to solve endlessly-long checkout lines, either, an annoyance that drove tens of thousands of customers to Wal-Mart. Beauty may be skin deep, but dumb goes all the way down to the bone.
Choice Three: Back to (Strategic) Basics
Discard last year’s numbers. Forget your competitors. Ignore your industry average. Start with a blank sheet of paper, and ask these simple questions:
1) Who do we need to reach?
2) How often?
3) What medium or combination of media is the most impactful way to reach them?
4) What will that cost?
5) The answer to #4 is doable; that’s our budget.
6) If the answer to #4 is not doable, let’s re-think #1.
It isn’t easy, but it is that simple. From a blank spreadsheet, identify communication goals, and begin building a plan to reach those goals, including the most effective and efficient vehicles to deploy. This takes the conventional process (“we have x dollars, what can we buy?”) and turns it on its head (“what will it cost us to reach Hispanic men, 18 to 35, three to seven times each quarter, men who change their own motor oil to save money, but are willing to pay a premium for the best brand?”)
Yes, it gets complicated.
Behind every effective advertising budget is a client who understands that breakthrough advertising is more than great creative insight: it’s also the result of far-sighted planning and prudent investment. Budgeting and priority-setting can involve complex choices among many attractive alternatives, so you should get help from trusted and experienced advisors to be sure your marketing and advertising budgets are not expenses, but investments. Wise ones.