Justifying Media Budgets

Justifying Media Budgets

When most of us try to determine how much to invest in the future we go through the same drill. Based on how much we make, we deduct our monthly and special expenses, put a little emergency money aside and the rest gets invested (if anything is left over). We invest sometimes for a quick return, but for the most part we are looking assure our future with equity. Marketers do much the same thing to arrive at advertising budgets, since they represent an investment in both the short and long-term future of their brand.

Madness and method

Over the years, marketers, account executives and media planners have devised a number of methods for arriving at an optimum media budget. Now, more than ever, the arbitrating method is almost always how much is affordable, but we like to think that other systems are employed to justify the expense beyond just plain old affordability.

Among the many methods employed are the task method, which identifies how much and what kind of media can be purchased at various budget levels. It selects a level that buys what is desired for the brand. Tracking past results and replicating past successes represents another way of pricing the brand's ad budget. Share of voice is yet another system to determine the budget allocation, wherein the budget is set by spending to a share of media money spent in the marketplace among all competitors in the brand's category. And there is the good old A/S ratio where the marketer examines the amount other competitors in the category spend in relation to sales and then approximates that level for his own brand. Sometimes, in a fit of even-handedness, all of these methods are used and a compromise is struck.

A/S Ratios and norms

A look at the top 100 U. S. advertisers and their A/S ratios is pretty revealing. The largest advertiser, G. M. runs with a 2.9% A/S ratio or put another way, the ad budget is nearly 3% of the company's sales. The number 100 advertiser is Mazda and they run at 5.4%. The average of all 100 advertisers is 3.6%

Looking more closely, Wal-Mart spends the least amount on advertising, relative to sales, 0.3% and American Housing Corp spends the most, 51%. Among the top 100 brands, 41 spend less than 5% on their A/S ratios, 27 spend 5-10%, 14 spend 10-15%, 10 spend over 15%, while 8 are not measured. So to those consumers who complain about the price of the products they buy being so high due to advertising, there is really not too much to the argument.

How high is too high?

A fair question to ask is when does the A/S ratio become too high? Latest research shows that advertising prompts 9-10% of an immediate sale and roughly 5% of future sales, within the context of brand equity. So it would seem that advertising on average immediately pays for itself if the A/S ratio is kept below 10%. Over the long haul, an A/S ratio of 15% is quite acceptable.
This means that according to data collected by the industry 2/3 of the top 100 advertisers are getting an immediate return on advertising on a magnitude that pays for itself. Counting advertising's influence on brand equity, over 80% of the top 100 advertisers are spending their money wisely.;

Of course while there are many qualifiers to these generalities like big brands and well-advertised brands have more equity and can therefore spend less to get a return. Promotion can play a greater or lesser part in the mix. Both category and a brand's selling price can be important to the ultimate A/S ratio. However it seems that big marketers know exactly what they are doing. Given the uncertainty of today's marketplace, at least that is comforting.