How to set politically correct budgets
Published on 12/04/1995 under Budgeting
Twenty years ago an article was published in the Journal of Advertising Research ("How Large Advertisers Set Budgets" October, 1975) suggesting that 60% of nonconsumer (business-to-business) marketers set their advertising budgets arbitrarily or according to what is affordable. Only 10% used the "objective and task" method of budgeting.
So what has changed?
In my experience, nothing. If anything, it's worse now than ever because we have a higher number of persons managing the advertising function who have not received any training in that area.
The ad manager is a dying breed. In his or her place, we have marketing managers, sales managers and product managers who have inherited the responsibility, but only as part of a much broader assignment.
When it comes time for budgeting, these upwardly mobile, "team players" are prone to select a budget that fits conveniently in the overall marketing budget without regard for competitive factors or the actual work to be done. By the time the advertising professionals are called in, the budget's a done deal.
That's a shame, because preparation of the annual advertising or marketing communications budget is one of the most important activities of any program year. If done properly, it provides a road map for success and efficient use of time and company resources.
Of course, the best way to set an appropriate marcom budget is as part of an annual marketing communications planning process. And, believe it or not, some companies actually still do this. You analyze the marketplace, define target audiences, set marketing and communications objectives and then develop strategies with corresponding budgets to accomplish the objectives.
It sounds simple, but in actual practice it requires significant effort and the cooperation of key managers, many of whom are too busy with other things to participate.
I remember coming back from an advertising conference in 1982 loaded for bear with some exciting new budgeting guidelines that had been developed using the famous PIMS database by Cahners Publishing in association with The Strategic Planning Institute.
As an aggressive, young (okay, mid-30s) marcom manager for a large chemical company, I was going to introduce a paradigm shift to my marketing and product managers years before we had any idea what a paradigm shift was.
Cahners had published a nifty 28-page workbook with a companion 8-page guidelines brochure and I had scored enough copies of each to distribute to all my key players. Which I did as soon as I got home, and then scheduled meetings with each manager to walk them through the workbook, step-by-step.
Only then did I realize the Cahners process exceeded the attention span of the average marketing/product manager by about 300%. My attempts to shorten and simplify the process succeeded only slightly in getting them to support the kind of budget increases I had in mind.
This is not to denigrate the Cahners workbook in any way. It contained some of the most helpful, on-target budgeting guidelines I've ever come across. I'm sorry they no longer distribute it, because many people who set budgets arbitrarily today would be well-advised to think more broadly about the subject before selecting a number that's simply convenient (e.g., what we spent last year, or X% of sales).
Here's a brief summary of the Cahners budgeting guidelines:
1. Market share is important. The higher your share, the more you should spend to protect it.
2. New products require higher advertising support than established ones. If your plans call for introducing several new products, you should beef up your budget.
3. Growth markets, that is ones increasing 10% or more annually, require a higher than average advertising investment.
4. Plant capacity utilization is a factor. If your plants are sold out, no problem. But if they're operating at 65% of capacity or less, you should think seriously about boosting the ad budget.
5. Products with low unit prices (less than $10,000) require higher ad support than ones with high unit prices.
6. Products that account for less than 5% of a customer's annual purchases need more advertising than those accounting for a high percentage of purchases.
7. Premium price products and heavily discounted products should get more advertising support than products with average prices.
8. Higher quality products generally require higher advertising expenditures. (And who said, "quality sells itself?")
9. Companies with broad product lines should budget more than companies with narrow product lines.
10 Standard, off-the-shelf products need higher advertising levels than custom, made-to-order products.
The Cahners workbook begins with a calculation of "served markets" and provides multipliers for each of the ten budget factors based on where your company fits. If you go through the entire process, you end up with a recommended budget that's objective and appropriate for the products and markets in which you compete.
You're right, it's too logical.
But in my humble opinion, the more politically correct way to set a marketing communications budget is to consider what it's going to take for you to succeed in the marketplace.
Because there's nothing like failure to flush a budding political career down the toilet.