Lakme
QUALITATIVE RESEARCH
Setting Advertising and Promotion Budgets in Multi-Brand Companies
GEORGE S. LOW, Texas Christian University
JAKKl J. MOHR, University of Montana
Despite the best efforts of brand managers in packaged-goods companies, strategic advertising and sales promotion spending decisions are frequently subject to organizational realities such as power, politics, and fourth-quarter (or mid-year) budget cuts. In many companies, budget allocation decisions are subject to competing pressures: iong-term objectives versus short-term needs, risk versus reward trade-offs, personal career success versus what 's best for the company, and so forth. Oftentimes, significantly greater sums are allocated to sales promotion than to advertising — to the detriment of the long-term competitive position of the brand 's image. This study examines the decision-making process brand managers use to set and allocate advertising and sales promotion expenditures for individual brands, with the objective of improving the process. We report the results of 21 depth interviews, highlighting the "best practices" of companies that are proactively coping with budgeting pressures, and offer suggestions on how to protect — and even increase, where warranted — advertising spending. For example, the companies in our study indicate that protecting advertising spending is more likely to happen when they:
• Tolerate the uncertainty associated with advertising spending. • Allocate funds based on forward-looking objectives {rather than historical precedent). • Use more experienced brand managers who car balance marketing research information with intuition. • Remain focused on brand equity.
These and other suggestions to help managers improve their marketing communications budgeting decisions are discussed.
"The most common way that brand managers set budgets is to start the same as last year. At least last year 's budget produced last year 's results. I 've rarely seen zero-based budgeting. The budget and its allocation is typically based on the marketing plan and what needs to be accomplished. Judgment is very much a part of the decision making process. Models are rarely used."
—Senior Marketing Vice-President, International grocery products company
DESPITE THE DECISION-MAKING TOOLS available in this information and technology age, frustration continues to haunt managers who set and allocate advertising and sales promotion budgets. In the current climate of flat budgets for many products and brands, and a concomitant interest in brand equity, loyalty, and customer value, many managers are particularly concerned about the proportion of their marketing budgets earmarked for short-term sales promotions as opposed to long-term brand advertising. Sales promotion accounted for 73 percent of all advertising and sales promotion spending in 1996 (Cox Direct). Manufacturers spent a staggering $489 billion, or 11%
The authors gratefully acknowledge the financial support from the Marketing Science Institute, the College of Busiess, University of Colorado in Boulder, and the Charles Tandy/ American Enterprise Center at Texas Christian University. In addition, they appreciate the assistance of Linda Price, Eric Arnould, and Bernie Jaworski in preparing for the depth interviews. Also, the comments of three anonymous reviewers, as well as Peter DePaulo, were especially helpful.
E-mail: G.Low@tcu.edu jmohr@selway.umt.edu Source: Journal of Advertising Research, January, February 1999, p. 67-78. of sales, on trade promotions in 1994, up from $15 billion or only 4 percent of sales in 1978 (Schiller, 1996). The trend toward integrated marketing communications (cf. McArthur and Griffin, 1997; Schultz and Kitchen, 1997), together with concerns about marketing budget efficiency, has pushed the issues surrounding effective advertising and sales promotion budget allocations to the top of many advertisers ' minds.
Past research related to setting and allocating marketing budgets has focused primarily on budgeting techniques such as the objective-and-task method, the affordable method, or percent of sales (cf. Bigne, 1995). Other research has focused on factors that affect advertising-and-promotion-to-sales ratios (Ailawadi, Farris, and Parry, 1994; Stewart, 1996), or factors that affect the relative allocation between advertising and sales promotion (Robinson and Luck, 1964; Strang, 1980). Yet, little is known about the day-to-day struggles of managers who are faced with setting and allocating these budgets.
The Advertising Research Foundation, the American Association of Advertising Agencies, and the Marketing Science Institute recently launched a collaborative research project called MAX: Managing Advertising Expenditures. The objective of their efforts is to improve current practice with respect to budgeting and evaluating advertising expenditures. Their project is motivated hy the concern that "many firms may have been making far from optimal investments in advertising [which] could result in a decline in the value of brands and in lower financial performance." Our concerns and objectives parallel those of the MAX Project.
Our research focuses on improving our understanding of the advertising and sales promotion budget allocation decision, identifying factors that enhance or impede effective decision making. When combined with the knowledge from other research of what "optima!" spending might be, our findings provide managers valuable insight into how to improve their budget allocation decision process.
METHOD
In our desire to take a fresh look at this problem, we conducted a series of depth interviews (some in person and some by telephone) with 21 managers in 8 consumer products firms. We focused on packaged-goods firms because managers in this industry are responsible for large advertising and sales promotion budgets. Most of the managers ' organizations were large (over $1 billion in sales and more than 5,000 employees), all had nationally distributed products, and all used both advertising and sales promotion. We wanted to find out, based on managers ' personal knowledge and experience, what factors influenced their allocation decisions. The best way to achieve this decision process perspective, we concluded, was by using a qualitative depth interview approach to generate rich descriptions of managers ' actual decision processes. The study 's two authors personally conducted each interview.
Because many different functions and levels are involved in advertising and sales promotion spending decisions, it was imperative to interview a wide range of managers. The majority of respondents were brand, product, and category managers (who were likely to have the most comprehensive and accurate viewpoints on advertising and sales promotion spending decisions for individual products). Other respondents had titles such as advertising manager, sales promotion manager, trade planning manager, and advertising research manager. Although the primary focus of our data-collection effort was on capturing the decision-making process of experienced front-line brand managers, we also interviewed high-level senior managers who supervised groups of products and brands (such as an executive vice president and division general manager) to ensure senior management representation and to provide as comprehensive a picture of the issues as possible. Many of the respondents had a high degree of experience, with 21 percent of them having more than 20 years ' experience in the business; another 74 percent had from 4 to 20 years of experience; the remaining 5 percent had fewer than 4 years of experience.
Lining up respondents proved to be one of the most challenging stages of the project. Brand and marketing managers were difficult to contact and most were initially reluctant to participate in research involving nearly an hour of their time. Contacts made at conferences were used in a snowballing technique to identify senior marketing personnel and brand managers at major packaged-good companies in the United States. We encouraged their participation and asked them to identify and invite brand and other marketing managers in their firm to be interviewed. Once these executives understood the nature and purpose of the research, they became willing, even eager, to participate in our study, given the importance of the topic to their firms.
Following standard interviewing procedures (McKracken 1988), we developed a series of broad, general questions about advertising and sales promotion spending decisions to guide our interviews, with more specific probes within each area. Importantly, the progression of the interviews was guided largely by the respondents. Approximately 45 minutes in length, each interview centered on three broad areas of questioning:
1. The decision processes and procedures used in the firm to set advertising and sales promotion spending levels.
2. Factors that influenced the allocation.
3. The evaluation of the effectiveness of the allocation.
These broad areas of questioning were refined on the basis of informal discussions and pre-testing with five marketing managers at a national conference. Interested readers can obtain the interview protocol by contacting either author.
One particularly sensitive aspect of our interviews, which we carefully considered before data collection, was talking with managers about practices which might have deviated from established norms of effective decision making. For example, if internal power and politics were influential in the spending decision, would our respondents be comfortable with acknowledging that fact and discussing it in some detail? To address these concerns, we paid particular attention to asking questions in such a way that respondents felt: (a) there was no judgment about their firm on our part and (b) that it was acceptable to acknowledge such factors. In addition, all respondents were assured of anonymity. Based on the responses we received in the interviews, we believe our qualitative method and questioning strategies were effective in encouraging managers to discuss sensitive budgeting issues.
The interviews were taped, and 289 pages of single-spaced transcripts were typed and systematically analyzed by both authors. First, the transcripts were read and checked for accuracy. Second, both authors independently re-read the transcripts and grouped common, recurring elements into categories. Each category consisted of an important, influential factor in the marketing communications budget allocation process and was supported with actual quotations from the interviews. The two authors then compared their two sets of categories, and similarities and differences were discussed and resolved. The result of this analysis was the reconstruction of key themes and issues across interviews, based on the qualitative data. These themes are reported in the following sections, relying on direct quotes by managers for support. As always with qualitative data, caution is warranted in generalizing our findings beyond our small, nonrandom sample. The extent to which the findings reported here are representative of a larger population requires quantitative estimation.
OVERVIEW OF THE BUDGETING DECISION PROCESS
Prior to discussing the specific factors that influence the budget allocation between advertising and sales promotion, we first describe three important characteristics of the budgeting process:
1. The nature of the decision process itself
2. The different perspectives of the people involved in it, and
3. The concerns about under-spending on advertising and over-spending on sales promotion
Managers first establish the overall strategic direction for the brand and set marketing objectives, ... Then, financial projections are made based on forecasts and objectives for the next year.
The nature of the decision process
Advertising and sales promotion budgets are set and allocated together as part of the annual brand marketing planning process (Low and Mohr, 1992). In many firms, a brand team approach to planning is used, involving managers from sales, trade marketing, manufacturing, accounting, and marketing research, as well as the brand manager, brand assistant, and group or category manager. Managers first establish the overall strategic direction for the brand and set marketing objectives, based on an extensive situation analysis. Then, financial projections are made based on forecasts and objectives for the next year. In addition, at this point, senior managers communicate financial expectations for the brand 's contribution to the corporate product portfolio. Third, the advertising and sales promotion budgets are set in order to achieve the objectives, relying on a combination of quantitative models and managerial judgment. The initial brand budget is then presented to a senior management panel who adjust and approve budgets for all brands in the company. Then, the plan and budget are implemented. Frequently, during the implementation phase, unplanned changes are made. Finally, the advertising and sales promotion budgets, once spent, are evaluated by comparing the achieved results with the objectives. This evaluation feeds into the planning sequence the following year.
The different perspectives of people involved in the decision
Inherent in the marketing communications budget allocation process is the conflicting nature of the accountabilities of the various people and functions involved.[1] Marketers want to see their brand thrive and prosper over the long term, but they must meet the quarterly and annual bottom-line profit expectations of senior management. The sales force is generally paid on volume sold. Advertising agencies are generally compensated by either a percentage of expenditures or a flat fee (neither of which is tied to brand volume or profit). Research is charged with offering insights available from data — and is often blissfully accountable only not to be wrong. These varying perspectives can set the stage for unresolvable value judgments in the budgeting process, many of which emerged in our interviews.
One important difference in perspectives that was frequently mentioned in interviews was the contrast between senior managers and brand managers. Brand managers formulate and implement plans for their individual brands to meet market needs, whereas senior managers seek to meet corporate needs. These two perspectives may not necessarily be in harmony. Indeed, given the specified role of the brand in the overall corporate portfolio, and modifications made by senior management during both the planning and implementation processes, brand managers may not have as much influence as they would like in setting the budget on a given brand. To some extent, the dynamics between brand and senior managers may be a function of corporate culture. In some organizations, such as Procter and Gamble, brand managers are expected to persuade and "push back" senior management, to find a way to get the funds they need. However, in other companies, senior managers have the final word in budgeting decisions, and brand managers would be jeopardizing their future with the firm if they pushed back (Decker, 1998).
Concerns about underspending on advertising and overspending on sales promotion
A frequently mentioned concern which weaves itself through most of our results was respondents ' overall dissatisfaction with the relative allocation between advertising and sales promotion. Brand managers are paid to make budget allocation recommendations that are in the best interest of their brands. The majority of managers we interviewed clearly expressed their desire to increase advertising and support their brand 's long-term equity. They also voiced their frustration with perceived over investments in sales promotion which they felt would lead to devalued brands and lower financial performance in the long run. Although this perceived imbalance did not hold true across all firms — some pointed out the many advantages of using sales promotions — there is much evidence, such as increasing retail concentration and a focus on short-term earnings (cf. Farris and Quelch, 1987) to support these concerns. Indeed, several of our respondents were quite explicit in their desire to see advertising given "equal opportunity" in the corporate environment and to off-set the pressures which tend to increase sales promotion expenditures with counterbalancing factors that would give advertising a better chance at the available pool of funds. We describe and discuss these competing forces in the next section.
FACTORS AFFECTING ADVERTISING AND SALES PROMOTION BUOGET ALLOCATIONS
Based on the insights from our respondents, we grouped our specific findings into three main categories:
1. The Good practices which managers felt contributed to an effective decision process.
2. The Bad—practices which were uncontrollable, frustrating realities of the decision process.
3. The Ugly—correctable flaws or problems in the decision process.
Although we treat these categories as being fairly distinct, they are very interrelated. By being more aware of the contributors and barriers to effective budget allocation decision making, managers may be able to better encourage or counterbalance their effects.
The Good
A number of managers shared with us aspects of their advertising and sales promotion budgeting decision that they felt were effective, especially those that gave advertising a more equal voice in the budget allocation process. These "best practices," divided into three main headings, include:
• Encourage risk in the organization. • Combine quantitative models with judgment. • Focus on brand differentiation.
Encourage risk in the organization The extent to which risk taking is encouraged or tolerated by the organization has an important influence on advertising and sales promotion budgeting decisions (e.g.. West and Berthon, 1997). If a firm wants creative ideas and approaches, it must offer its decision makers the opportunity to learn from the market and the freedom to make mistakes. Indeed, research on innovation suggests that penalizing people for creative ideas that do not work out is a strong way to stifle creativity (Amabile, 1983). Tolerating inherent risk and ambiguity that characterize advertising allocations—and the attendant consequences — may encourage more creativity in marketing plans.
However, as one brand manager commented:
The corporate culture makes the bottom line. If you go out on a limb and spend ten million dollars and don 't make the plan and don 't make the profit, you 're gone.
In this situation, the manager felt that advertising spending—with the accompanying possibility that it may not deliver the planned results—might be risky. In fact, as this manager said, not making "the plan" could lead to being fired.
In addition, many firms have a business climate that does not generally encourage risky, creative advertising ideas. One manager we interviewed commented:
The business environment, a kind of sociology, if you will, makes it very difficult for great advertising to come out today. Compared to years ago when owner-entrepreneurs would look at great advertising and say, "you 're right, I understand why that would be appealing."
The inherent riskiness of advertising spending compared to sales promotion spending further exacerbates this situation. For example, consumer and trade promotion outcomes are more easily measured than advertising outcomes. The following manager noted this when referring to the effects of sales promotions.
The research over the past ten years showing the sales spikes when sales promotion has been used has been a disservice to marketing. The heart of the marketing plan is consumer value and brand equity. We try to reward people who are adding value.
We expect that in risk-averse companies, managers will allocate relatively more dollars to sates promotions and less to advertising. Given the inherent creativity involved in advertising decisions, as well as the inherent ambiguity that surrounds them, firms may need to take a good hard look at their corporate culture to assess whether or not it penalizes advertising because it is more risky. A senior marketing manager we interviewed felt that one way to deal with this problem would be to make advertising seem less risky, as this quote illustrates:
It 's stupid to go out and say, "look at how creative we are." I think what is smart to do is get a bunch of creative people and say, "now we are the advertising agency that doesn 't have any guys with beards working at it. They look like they all work for IBM. They think and act like they all work for IBM. They come up with the same creative ideas. But in a way that is perceived as safer and more left brain, more logical, more rational."
Given the inherent risk-aversion in most companies today, this approach —- where advertising and other long-term communications efforts are made to appear less risky by supporting creative, brandfranchise-building ideas with research results and by demonstrating their short-term effects — may be useful.
Combine quantitative models with judgment The increasing sophistication and use of marketing information (such as single-source and scanner data) and computer systems have the potential to assist managers in setting and allocating their marketing budgets. In our interviews, firms who developed and used modeling techniques to guide the allocation decision appeared to be more successful at attaining a more "optimal" budget allocation. As these two managers explained:
We happen to have a promotional analysis system provided for us by Nielsen, based on actual consumer sales using supermarket scanner data, which shows that in our product category, feature pricing wasn 't generating incremental sales. We learned that we didn 't need to be spending those dollars there and looked for other ways to spend them.
We had McKinsey do a study for us which showed us that we are wasting our money just putting dollars out there for the trade. We were getting trade customers to buy, but we weren 't getting consumer pull-through. We were loading warehouses.
These comments illustrate that, interestingly, the reliance on hard marketing information, which many believe can bias budget allocations to promotional tools with easily measured results, does not necessarily lead to more sales promotion spending. Indeed, depending on the specific results of this kind of analysis, such data may work against allocating dollars to consumer and trade promotions. Brand managers may also need to work harder to get quantitative support for their advertising programs. For example, copy testing comparing this year 's campaign to last year 's might be an effective way to get more objective assessments of advertising into the process.
Despite the increasing reliance on quantitative marketing models, our respondents noted the tendency of their spending decisions to be based on gut feel and intuition:
What gets a lot of support simply depends on how much people like [the ideas]. How much senior managers think: "boy, that 's a great (or lousy) ad" — despite the fact the lousy ad might be proven to be effective. It 's gut reaction and intuition. There 's a massive amount of gut reaction.
Clearly, managerial experience can be valuable when it is based on sound judgment and intuition. While analytical models are useful, managers often rely on insights based on personal experience in order to adjust the information provided by the models. Indeed, prior research shows that combining output from analytical models with managerial judgment and intuition can lead to the best decisions (Blattberg and Hoch, 1990).
In the advertising area in particular, managers have a tendency to rely on judgment and intuition: results from advertising expenditures are perceived as being more difficult to quantify than those from increased promotional spending. Further, budget allocations to advertising are often heavily influenced by the anticipated quality of the advertising creative message, which in many firms is a subjective decision as well. Our results show that allowing more experienced managers to use their well-trained judgment may actually result in more effective budgeting decisions, as illustrated by this manager:
I think experienced managers tend to be more willing to take risks on the fact that advertising will have an impact.
Some would go so far as to argue that brand equity and quality creative are a brand manager 's key responsibilities.
Yet, other managers express a continued desire for better quantitative techniques to isolate the sales effects of advertising:
I would like some kind of model which would evaluate the incremental sales contribution of advertising spending. That 's the toughest of all. Is advertising really contributing to sales, and what part of the brand 's sales increase can be attributed to advertising? And how do we know that $20 million in advertising is enough? Or too much? What is the optimal spending level? Those questions are still unanswered. We need more science in it.
Increasingly, such quantitative tools are available from a variety of research firms. Marketplace modeling of advertising, consumer promotion, and trade promotion is being used to guide optimal marketing spending at large packaged goods companies. Clearly, managers should continue developing expertise and comfort in using more quantitative tools, in addition to their expert judgment in making budget decisions.
Focus on brand differentiation. The power of the brand 's marketing idea is the strength of a product 's differentiation, competitive advantage (both real and perceived), or unique selling proposition. A common theme in our interviews was that brand differentiation strategies facilitate a more balanced advertising and sales promotion budget.
Next year they 're talking about cutting our trade budget. And I really don 't have a problem with it. It seems like the message is more powerful than what the trade dollars are doing . . .
And our trade customers are selling more of the 30-35% margin [based on effective advertising]. That 's a heck of a lot more dollars in their pocket versus the $1.20 a case that they would get three times a quarter [on a trade promotion].
And, as another brand manager said:
To the degree that we can be persuading consumers to buy our products on the strength of ideas, as opposed to the lowness of the price, that 's a good thing. The people who win are those who have added value through consumer-focused communi- cations and not through trade deals.
These quotes illustrate the importance of basing allocation decisions on the power of the brand 's marketing idea: a strong brand provides a convincing rationale for budgeting and allocating a greater amount to advertising. This issue is clearly related to brand equity, a topic to which managers in our interviews were sensitive:
Advertising was so minimal that our sales kept dropping, even though we put a lot of money into trade promotion. We 've done more advertising now than in the past five or six months because we realized we cannot continue this trend of de-emphasizing advertising and using trade promotion. We just don 't have the brand equity we used to.
But the mold had been cast — and since then, price promotion has been a major problem in this industry. At the height of the buy one-get one free activity, the category took its worst plunge up to that point, and the category went down 10%. And we said to ourselves, what 's going on? And what we found out is the message we were giving the consumer is: "This product isn 't as good as it used to be — it 's not worth what it used to be." Whether the quality had actually gone down is irrelevant, it 's the perception.
The importance of the strength of a brand 's message and brand equity in the allocation decision deserves reiterating: brand equity and quality creative ideas are important ingredients in budget allocation decisions. Some would go so far as to argue that brand equity and qualify creative are a brand manager 's key responsibilities.
To be sure, advertising is vital to brand equity. However, advertising, per se, is not a sacred cow that should necessarily be part of every year 's marketing allocation. Monies should be allocated to advertising only if it has a clearly defined role within that year 's strategy for meeting a brand 's goals. Without a USP, important news, or a strategy to sustain brand-image development, advertising budgets might best be otherwise allocated. While this reality may be difficult for a brand manager to accept, it may be the best decision for the brand, as well as for the company as a whole.
The Bad
For many marketers, there are uncontrollable, frustrating realities in the budgeting process, far removed from the "best practices" notions detailed previously. For the most part, managers were able to adjust their decision making in ways that allowed them to cope with (rather than change) these frustrations and minimize their impact on effective decision-making. Three factors in this category emerged from the interviews: • retailer power • short-term focus • top-down influence
Retailer power relationships with channel members clearly are tied to a firm 's relative spending on advertising or sales promotion, as witnessed by Procter and Gamble 's difficulties with retailers in implementing its every-day-low-price policy. Our interviews were replete with specific examples of trade members ' "strong-arming" manufacturers, threatening to drop product lines without more spending on trade promotions. For example:
When you look at the leverage between increases in volume as a source of income gains for them (retailers) versus increases in their margins stemming from increased allowances, the thing is highly leveraged toward allowances. They 're able to get a whole lot more money on the table more quickly by extortion in some instances than by necessarily working as partners with us in moving the business forward and trying to move additional volume.
Managers we interviewed are working with retailers to change this situation— even if the retailers themselves are not. Managers handled this by working with retailers in making trade promotion dollars more effective by forming partnerships to find win-win solutions. Such partnerships allow the manufacturers to work with the retailer in more creative ways that can be beneficial to both (Mohr and Low, 1993). Some of the solutions used by participants in our study included measuring the effectiveness of promotional activities for retailers, planning joint promotions that are effective for both parties, category management, and even paying retailers for long-term growth in important categories. In such cases, relationships may become more cooperative and less antagonistic. Trade promotion dollars may be less important in such situations since the relationship will be built on trust and cooperation rather than on power and financial incentives like slotting allowances. As trade partnerships are formed, with an increase in communication and the establishment of mutual objectives between manufacturers and retailers, trade-directed promotion may involve more time and less cash. As the following manager pointed out, the short-term nature of trade promotions may actually work against forming partnerships that necessitate a long-term focus and commitment from both partners:
[Partnerships] have been held up or held back due to short-term decision making . . . slotting [allowances] can get in the way of forming long-term partnerships with our retailers.
Short-term focus. Firms in today 's business environment grapple with the need to deliver quarterly results that show steady improvement. The quick turnover in brand management, where managers are promoted to a different brand each year or two, puts extreme pressure on brand managers to deliver results or (at the extreme) lose their jobs. This pressure clearly affects marketing communications spending decisions:
Brand managers ' careers are based on making things happen quickly. . . . You have your annual profit goals to make and when you 're not making your volume goal, it 's an easy target to take money from advertising.
Financial pressure encourages people to build the numbers around achieving a quick profit, rather than saying, "Am I building a plan that is beneficial to the long-term image of the brand?"
It is highly unlikely that somebody who is being measured monthly or quarterly is going to take an enlightened view of a long-term profitable marketing plan.
Brand people have to show progress — they have to sell more each quarter than the year before. The easiest way to do that is through trade promotion.
Given these short-term pressures at the brand level, one might hope that senior management is looking out for the long-run interests of the brand. However, at least one example shows that senior managers are not immune to these short-term pressures either:
Our president is responsible to shareholders and the banks, and he feels pressure in that environment ... there is no question that in the allocation of the actual marketing dollars, that the short-term focus to not only make the quarter, but make the month, has driven some of our thinking and in fact it 's driven more of our contingency planning. You go into a fiscal year, you develop a budget, and the way budgets are reallocated is definitely more in favor of making and achieving short-term goals.
The firm 's compensation system is also an important contributor to this short-term mentality. While there are many compensation issues related to advertising spending decisions, one that emerged from our interviews involved the discrepancy in evaluation systems between sales and brand managers. Those firms where compensation systems are being updated to reflect uniform profitability goals across sales and marketing are more successful in achieving the desired, strategic mix of sales promotion and advertising.
Courage and discipline were also frequently mentioned in the attempts to overcome short-term thinking.
We need to discipline ourselves to have less of an emergency orientation. It requires discipline and foresight to get through the short term and not be tempted to spend inappropriately to address immediate problems.
It 's just a matter of discipline and getting that selling proposition, the creative to the level that it really is going to be effective and then having the intestinal fortitude to stick with it.
Top-down influence. In many companies, senior managers influence the budgeting decision in ways that make sense at a corporate level, given their broader responsibilities and concerns. However, their broader concerns may necessitate tradeoffs that can be perceived as damaging to an individual brand. We recognize that this perception may stem from the bottom-up perspective of the brand managers and some of the other respondents whom we interviewed (who may resent the involvement of management in "their" budgeting decisions). However, the perception that senior managers ' influence prevented effective decision making at the brand level was so prevalent in our interviews, we feel it deserves mentioning here as a frustrating reality of the decision process. As one manager pointed out, negotiating a budget with senior management can be disappointing:
Managers can do little to prevent top-down influence, but they can deal with it by making it clear to senior managers what the potential long-term consequences of such decisions can be.
It 's top-down in terms of total dollars and then it tends to be fairly iterative in terms of the allocation of those dollars between advertising, consumer, and trade , . . Generally, we 're given a total number from the top. We develop a program, it gets kicked around between our vice-president and the president of the company. It comes back and then we go back and forth until we get a plan that I 'd like to say everybody 's happy with, but really it means that the guy at the top is happy with.
This quote illustrates a common concern voiced across a number of interviews — that budget numbers are coming down from the top, from managers who are removed from the brand 's business and who do not rely on a careful analysis of objectives and quantitative evidence in making their decision. Indeed, the input of senior managers may not be subject to the same rigorous analysis on which the original allocation was based: The organization functions in two very different ways. The people on the lower levels try to be very analytic and figure out the best recommendation. Senior managers operate much more judgmentally. It is not scientific.
While not explicitly stated by our respondents, the implicit message is that brand managers believe that their own judgment can be an asset in the budget/allocation decision process because it is typically complemented with logical reasoning and research results, whereas senior managers ' use of judgment is viewed as problematic.
Frequently, senior managers ' involvement in the budgeting process comes during the implementation phase, when they react to financial pressure and dictate changes to the budget which deviate significantly from the plan. The Vice President of our product group was getting heat from upstairs to "get out of the business if you 're not going to make money on it." He decided to cut media. It went from $13 million at one point all the way down to $2 million. Our New York agency threw up their hands and said "forget it, we 're not going to do any more plans." We had probably fifteen plans, which was terrible. I thought we should have paid them some kind of penalty.
Managers can do little to prevent top-down influence, but they can deal with it by making it clear to senior managers what the potential long-term consequences of such decisions can be. The degree to which they can do so will depend on the corporate culture and expectations of brand managers in the firm.
The Ugly
This final set of factors includes the flaws or problems in the advertising and sales promotion budgeting decision process that are more correctable in nature than the previous set. Many managers have found ways to counteract the problems presented below, and we discuss these ideas as well. Three such factors/practices came out of our study: • political sales force influence • historical inertia • ad hoc changes
Political sales force influence By its very nature, organizational decision making is a political process (Piercy, 1987). A number of managers interviewed suggested that such political behavior is commonly exhibited by the firm 's sales force when advertising and sales promotion spending decisions are being made. As one manager observed: You 've got a huge political force inside every company that has a sales force. For example, everybody knows that trade promotion is bad. Coupons we feel are bad and so forth — short term, doesn 't build equity and all that. On my brand we proposed moving our trade budget down. I had my boss 's approval to do that, and we took it to a sales meeting, and the sales people said "we don 't want to do that," and my boss said, "oh gee, I guess we better not do that," and therefore, it was never done.
The political behavior of members of the sales force often takes the form of informal, casual conversations in hallways, cafeterias, etc. The following manager 's comments illustrate this well:
The fact of the matter is that, because sales — unlike say, the consumer promotion agency or the advertising agency — lives here in the building ... it 's just that they 're here. It 's the power of proximity.
... including the sales force in the formal planning process might be an important factor in minimizing the impact of political influence in budgeting decisions.
The political pressure of the sales force to emphasize sales promotion is not a surprising phenomenon. However, several of the managers with whom we spoke talked about how to strategically use the sales force to help reduce sales promotion spending. Many firms use a brand team approach to marketing planning which typically includes the direct, formal involvement of a representative of the firm 's sales force—a group which has a particular interest in the amount of the marketing budget allocated to sales promotion. Although one might expect that in such instances, the sales force representative may attempt to maintain or increase the budget allocation to trade promotion, the depth interviews revealed that when sales people are included as a formal member of the brand team, they often exhibit greater commitment and less antagonism to the resulting allocation (regardless of the relative spending on sales promotion) than when they are not formally involved. As one product manager explained:
In terms of working through the plan, our sales counterpart worked with us step by step through the analysis. I would characterize his involvement as a kind of devil 's advocate, in terms of helping us think through the right questions to be addressed analytically. But in terms of his involvement, being that it was up front, and he was part of the process, he explicitly bought into the conclusion at the end point.
This latter insight shows that actually including the sales force in the formal planning process might be an important factor in minimizing the impact of political influence in budgeting decisions. If the sales manager participates and believes in the process used to allocate budgets, she or he may have greater commitment to implement the plan, even if it means a reduced level of spending for trade promotion.
Historical inertia. One factor that emerged strongly from our interviews was the effect of historical precedent on a firm 's spending decisions. To a large extent, the trend toward sophisticated modeling and objective-task ("zero-based") budgeting led us to initially underestimate the importance of the effect of historical inertia. However, the managers we interviewed repeatedly mentioned the impact of the previous year 's advertising and sales promotion budget in the decision process.
In the absence of good hard information that gives people a road map on how to allocate resources, they will do in most cases what has historically been done, with a bit of intuition thrown in. And that, of course, is tempered by just how available resources are.
Clearly, the number one factor is precedent. 1 think everybody enters into the process by looking at what was the relative allocation to advertising, consumer promotion, and trade promotion historically. And that forms the benchmark.
If you vary much from the historical you have to prove it.
We had a number in mind going in that we had developed in the prior year as far as what we needed, and then from that point, you look at either going higher or lower based on the previous year 's number.
Trade promotion spending was a big part of that precedent:
Trade 's a given, and every time you give in and increase your trade spending it never comes back, it never goes away. That 's a cost of doing business you build in and that 's where you start.
Some managers were wary of the reliance on historical precedent:
Temper that [the allocation] with reason — history and reason are different. History isn 't always reasonable.
Even when managers can "prove" a reason to deviate from historical precedent, senior managers might not follow it. For example, one of our managers had results from a controlled experiment that showed more effectiveness from a radically different allocation than historical precedent. But, the senior managers would not buy into the results and would not change the allocation.
Some managers noted a desire and effort to better match allocations to a brand 's goals for the coming year, rather than relying on historical precedent. For example:
Our plan is still one of building awareness, high awareness for the brand because it is relatively new. But at the same time we needed to build trial. Our repeat purchases are very high on this brand. Once a consumer tries it and really likes it, he comes back and buys not only the product, but he buys in greater quantities. So our objectives are real clear: a lot of awareness and a lot of trial. So we put more money into media and the percentage of promotions decreased.
Managers who reported a strong influence of goals and objectives for the brand on their spending decisions generally felt the resulting allocation was more "optimal." This is a very important point, because setting objectives can help to overcome some of the barriers to effective decision-making in setting and allocating advertising and sales promotion budgets.
Ad hoc changes. A number of managers expressed concern with changes made to their advertising and sales promotion budgets during the implementation phase. These modifications are often made quickly in response to unexpected developments in the marketplace, without regard for the long-term consequences of such changes. The following quotes capture this:
In a sense it 's reactionary. You go into the year with a plan that 's really ideal in some respects. But as you go through the year, if you 're not making your plans, you have to spend less money to compensate for the shortfall. If I then cancel a trade or consumer promotion, my sales will even fall shorter. If I don 't run the advertising, sales may not be affected too much since advertising is more long-term and I can pick it up again later.
They are constantly slashing the advertising budget to pay for all the additional trade deals. You see a lot of it. They will come out with a certain advertising budget and keep cutting it down, down, down.
This manager felt that not much could be done about ad hoc changes. It is the nature of business and also illustrates well the point of view of senior management:
Flexibility is a central part of managing brands. It 's fire drills, it 's reality. There 's lots of things you have to be prepared for. You have to realize that any big company is a portfolio of different cash streams. If one cash stream goes down, the tendency is to portfolio manage and ask other people for more. That happens all the time.
However, changes made to the original brand plan in mid-year can compromise its original intent:
The easiest budget to put together from a strategic standpoint is the one going into the year. It 's maintaining that budget and maintaining the strategic integrity of that budget that is most difficult.
While difficult, maintaining the "strategic integrity" of carefully planned budgets is possible by including contingency plans and anticipating potential bumps in the road.
CONCLUSIONS
The advertising and sales promotion budgeting process conhnues to be a perplexing issue for advertising and brand managers. Our research was motivated by a desire to better understand the factors that affect the allocation between advertising and sales promotion. Most of the managers we interviewed felt that institutionalized pressures led to a greater proportion of their marketing budgets being spent on sales promotions than they would have liked and wanted to see advertising given "equal opportunity" in the corporate environment.
Effective advertising budgets are conceived in a strategic planning framework which includes an integrated marketing communications philosophy.
The results of our study have implications for at least three groups of people: brand managers, advertising agencies, and marketing researchers. The primary implication is that brand managers should use a comprehensive marketing strategy to guide their marketing communications budgeting decisions and avoid the piecemeal approach of making advertising and sales promotion spending decisions independently. Effective advertising budgets are conceived in a strategic planning framework which includes an integrated marketing communications philosophy. Such an approach allows managers to make more direct trade-offs in allocating budgets. Based on our results, managers who desire a more equitable advertising-sales promotion budget allocation should also:
1. Use a brand team approach - involve managers from many departments in budgeting decisions.
2. Build contingency plans into the budget allocation which anticipate potential mid-year or fourth-quarter changes.
3. Consistently evaluate the performance of past programs by comparing outcomes to the intended strategic objectives.
4. Focus on long-term, overall performance.
Advertising agencies can also benefit from our research findings. For example, account executives could work closely with clients to:
1. Focus on building stronger brand equity, adopting a more holistic view of clients ' organizations and marketing strategies.
2. Center the advertising planning process on goals for the coming year (versus inertia or historical precedent) such as specific awareness or sales increases.
3. Be aware of the influence of sales, and channel members on the allocation decision.
4. Adopt a more strategic point of view in helping clients determine the amount to spend on advertising and sales promotion programs. More advertising may not always be the solution, depending on the brand 's positioning strategy.
While some of these issues are outside of an ad agency 's responsibility, advertising executives can help clients to be aware of the potential influence of such factors. By making clients aware of these hurdles to effective decision making, behavior can be changed.
The third group who can benefit from the results of this study is marketing researchers. As pointed out in several of our interviews, marketing researchers continue to develop sophisticated tools to better explain and predict sales response to advertising and sales promotion spending. Our findings suggest that knowing the "optimal" amount to spend on advertising is only one piece of the budget allocation puzzle. An equally important piece is creating a corporate environment that allows the desired level of spending to occur. As they develop analytical tools to discover the optimal amount for advertising and sales promotion spending, marketing researchers should realize the hurdles involved in getting the optimal spending amount approved and implemented. Models could be developed which incorporate managerial judgment, corporate objectives, and long-term outcomes in order to provide a more realistic and useful decision tool.
Organizational realities are a major barrier in effectively allocating advertising funds, given the pressures outlined in our study. By actively dealing with these pressures head on, managers can significantly improve the way they determine their advertising and sales promotion budgets.
GEORQE S. LOW is an assistant professor in the marketing department of the M. J. Neeley School of Business at Texas Christian University in Fort Worth, Texas. His Ph.D. in marketing is from the University of Colorado-Boulder. He also received an M.B.A. from the Ivey School of Business, University of Western Ontario, and a B.A. in advertising from Brigham Young University. He spent four years as a media planner with MacLaren McCann Advertising (Canada). His research focuses on integrated marketing communications management and has been published in the Journal of Marketing Research, the Journal of Retailing. Marketing Management, and the Marketing Science Institute 's working paper series,
JAKKI J. MOHH is associate professor of marketing at the University of Montana. She has a Ph.D. (1989) in business marketing from the University of Wisconsin. Prior to her position at the University of Montana, Professor Mohr served on the faculty at the University of Colorado, Boulder (1989-1997) and worked in advertising in Silicon Valley for Hewlett Packard 's Personal Computer Group and TeleVideo Systems. Her research has been published in the Journal of Marketing and the Strategic Management Journal, and other journals.
REFERENCES
AILAWADl, K. L., p. W. FARRIS, and M- E. PARRY. "Share and Growth Are Not Good Predictors of the Advertising and Promotion/ Sales Ratio." Journal of Marketing 58, 1 (1994): 86-97.
AMABILE, T. The Social Psychology of Creativity. New York: Springer-Verlag, 1983.
BIGNE, E. "Advertising Budget Practices: A Review." Journal of Current Issues and Research in Advertising, 17, 2 (1995); 17-33.
BLATTBERG, R., and S. HOCH. "Database Models and Managerial Intuition: 50% Model + 50% Manager." Management Science 36, 8 (1990): 887-99.
COX DIRECT. 19th Annual Survey of Promotional Practices. 1997.
DECKER, C. Winning with the P&G 99: 99 Principles and Practices of Procter and Gamble 's Success. New York: Pocket Books, 1998.
FARRIS, P. W., and J. A. QUELCH, "In Defense of Price Promotion," Sloan Management Review 29, 1 (1987): 63-69.
LOW, G. S., and J . MOHR, "The Advertising-Sales Promotion Trade-Off: Theory and Practice." Marketing Science Institute Working Paper Series, #^2-127, Cambridge. MA, 1992.
MCARTHUR, D. N., and T. GRIFFIN. "A Marketing Management View of Integrated Marketing Communications." Journal of Advertising Research 37, 5 (1997): 19-27.
MCKRACKEN, G. "The Long Interview." in Qualitative Research Methods. Volume 13. Newbury Park, CA: Sage Publications, 1988.
MOHR, J., and G. S. LOW. "Escaping the Catch-22 of Trade Promotion Spending." Marketing Management 2. 2 (1993): 30-39.
PlERCY, N. F. "The Marketing Budgeting Process: Marketing Management Implications." Journal of Marketing 51, 4 (1987): 45-59.
ROBINSON, P.J. and D.J. LUCK. Promotional Decision Making: Practice and Theory. New York, NY: McGraw-Hill, 1964.
SCHILLER, Z. "Make it Simple." Business Week. September 9, 1996.
SCHULTZ, D. F., and P. J. KITCHEN. "Integrated Marketing Communications in U.S. Advertising Agencies: An Exploratory Study." Journal of Advertising Research 37, 5 (1997): 7-19.
STEWART, D. "Allocating the Promotional Budget: Revisiting the Advertising and Promotion-to-Sales Ratio." Marketing Intelligence & Planning 14, 4 (1996): 34-38.
STRANG, R. A. The Promotional Planning Process. New York, NY: Praeger, 1980.
WEST, D,, and P. BEKIHON. "Antecedents of Risk-Taking Behavior by Advertisers: Empirical Evidence and Management Implications." Journal of Advertising Research 37, 5 (1997): 27-41.
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[1] Our thanks to an anonymous reviewer for the insights about these various roles and tensions.
References: AILAWADl, K. L., p. W. FARRIS, and M- E. PARRY. "Share and Growth Are Not Good Predictors of the Advertising and Promotion/ Sales Ratio." Journal of Marketing 58, 1 (1994): 86-97. AMABILE, T. The Social Psychology of Creativity. New York: Springer-Verlag, 1983. BIGNE, E. "Advertising Budget Practices: A Review." Journal of Current Issues and Research in Advertising, 17, 2 (1995); 17-33. BLATTBERG, R., and S. HOCH. "Database Models and Managerial Intuition: 50% Model + 50% Manager." Management Science 36, 8 (1990): 887-99. COX DIRECT. 19th Annual Survey of Promotional Practices. 1997. DECKER, C. Winning with the P&G 99: 99 Principles and Practices of Procter and Gamble 's Success. New York: Pocket Books, 1998. FARRIS, P. W., and J. A. QUELCH, "In Defense of Price Promotion," Sloan Management Review 29, 1 (1987): 63-69. LOW, G. S., and J . MOHR, "The Advertising-Sales Promotion Trade-Off: Theory and Practice." Marketing Science Institute Working Paper Series, #^2-127, Cambridge. MA, 1992. MCARTHUR, D. N., and T. GRIFFIN. "A Marketing Management View of Integrated Marketing Communications." Journal of Advertising Research 37, 5 (1997): 19-27. MCKRACKEN, G. "The Long Interview." in Qualitative Research Methods. Volume 13. Newbury Park, CA: Sage Publications, 1988. MOHR, J., and G. S. LOW. "Escaping the Catch-22 of Trade Promotion Spending." Marketing Management 2. 2 (1993): 30-39. PlERCY, N. F. "The Marketing Budgeting Process: Marketing Management Implications." Journal of Marketing 51, 4 (1987): 45-59. ROBINSON, P.J. and D.J. LUCK. Promotional Decision Making: Practice and Theory. New York, NY: McGraw-Hill, 1964. SCHILLER, Z. "Make it Simple." Business Week. September 9, 1996. SCHULTZ, D. F., and P. J. KITCHEN. "Integrated Marketing Communications in U.S. Advertising Agencies: An Exploratory Study." Journal of Advertising Research 37, 5 (1997): 7-19. STEWART, D. "Allocating the Promotional Budget: Revisiting the Advertising and Promotion-to-Sales Ratio." Marketing Intelligence & Planning 14, 4 (1996): 34-38. STRANG, R. A. The Promotional Planning Process. New York, NY: Praeger, 1980. WEST, D,, and P. BEKIHON. "Antecedents of Risk-Taking Behavior by Advertisers: Empirical Evidence and Management Implications." Journal of Advertising Research 37, 5 (1997): 27-41.
Setting Advertising and Promotion Budgets in Multi-Brand Companies
GEORGE S. LOW, Texas Christian University
JAKKl J. MOHR, University of Montana
Despite the best efforts of brand managers in packaged-goods companies, strategic advertising and sales promotion spending decisions are frequently subject to organizational realities such as power, politics, and fourth-quarter (or mid-year) budget cuts. In many companies, budget allocation decisions are subject to competing pressures: iong-term objectives versus short-term needs, risk versus reward trade-offs, personal career success versus what 's best for the company, and so forth. Oftentimes, significantly greater sums are allocated to sales promotion than to advertising — to the detriment of the long-term competitive position of the brand 's image. This study examines the decision-making process brand managers use to set and allocate advertising and sales promotion expenditures for individual brands, with the objective of improving the process. We report the results of 21 depth interviews, highlighting the "best practices" of companies that are proactively coping with budgeting pressures, and offer suggestions on how to protect — and even increase, where warranted — advertising spending. For example, the companies in our study indicate that protecting advertising spending is more likely to happen when they:
• Tolerate the uncertainty associated with advertising spending. • Allocate funds based on forward-looking objectives {rather than historical precedent). • Use more experienced brand managers who car balance marketing research information with intuition. • Remain focused on brand equity.
These and other suggestions to help managers improve their marketing communications budgeting decisions are discussed.
"The most common way that brand managers set budgets is to start the same as last year. At least last year 's budget produced last year 's results. I 've rarely seen zero-based budgeting. The budget and its allocation is typically based on the marketing plan and what needs to be accomplished. Judgment is very much a part of the decision making process. Models are rarely used."
—Senior Marketing Vice-President, International grocery products company
DESPITE THE DECISION-MAKING TOOLS available in this information and technology age, frustration continues to haunt managers who set and allocate advertising and sales promotion budgets. In the current climate of flat budgets for many products and brands, and a concomitant interest in brand equity, loyalty, and customer value, many managers are particularly concerned about the proportion of their marketing budgets earmarked for short-term sales promotions as opposed to long-term brand advertising. Sales promotion accounted for 73 percent of all advertising and sales promotion spending in 1996 (Cox Direct). Manufacturers spent a staggering $489 billion, or 11%
The authors gratefully acknowledge the financial support from the Marketing Science Institute, the College of Busiess, University of Colorado in Boulder, and the Charles Tandy/ American Enterprise Center at Texas Christian University. In addition, they appreciate the assistance of Linda Price, Eric Arnould, and Bernie Jaworski in preparing for the depth interviews. Also, the comments of three anonymous reviewers, as well as Peter DePaulo, were especially helpful.
E-mail: G.Low@tcu.edu jmohr@selway.umt.edu Source: Journal of Advertising Research, January, February 1999, p. 67-78. of sales, on trade promotions in 1994, up from $15 billion or only 4 percent of sales in 1978 (Schiller, 1996). The trend toward integrated marketing communications (cf. McArthur and Griffin, 1997; Schultz and Kitchen, 1997), together with concerns about marketing budget efficiency, has pushed the issues surrounding effective advertising and sales promotion budget allocations to the top of many advertisers ' minds.
Past research related to setting and allocating marketing budgets has focused primarily on budgeting techniques such as the objective-and-task method, the affordable method, or percent of sales (cf. Bigne, 1995). Other research has focused on factors that affect advertising-and-promotion-to-sales ratios (Ailawadi, Farris, and Parry, 1994; Stewart, 1996), or factors that affect the relative allocation between advertising and sales promotion (Robinson and Luck, 1964; Strang, 1980). Yet, little is known about the day-to-day struggles of managers who are faced with setting and allocating these budgets.
The Advertising Research Foundation, the American Association of Advertising Agencies, and the Marketing Science Institute recently launched a collaborative research project called MAX: Managing Advertising Expenditures. The objective of their efforts is to improve current practice with respect to budgeting and evaluating advertising expenditures. Their project is motivated hy the concern that "many firms may have been making far from optimal investments in advertising [which] could result in a decline in the value of brands and in lower financial performance." Our concerns and objectives parallel those of the MAX Project.
Our research focuses on improving our understanding of the advertising and sales promotion budget allocation decision, identifying factors that enhance or impede effective decision making. When combined with the knowledge from other research of what "optima!" spending might be, our findings provide managers valuable insight into how to improve their budget allocation decision process.
METHOD
In our desire to take a fresh look at this problem, we conducted a series of depth interviews (some in person and some by telephone) with 21 managers in 8 consumer products firms. We focused on packaged-goods firms because managers in this industry are responsible for large advertising and sales promotion budgets. Most of the managers ' organizations were large (over $1 billion in sales and more than 5,000 employees), all had nationally distributed products, and all used both advertising and sales promotion. We wanted to find out, based on managers ' personal knowledge and experience, what factors influenced their allocation decisions. The best way to achieve this decision process perspective, we concluded, was by using a qualitative depth interview approach to generate rich descriptions of managers ' actual decision processes. The study 's two authors personally conducted each interview.
Because many different functions and levels are involved in advertising and sales promotion spending decisions, it was imperative to interview a wide range of managers. The majority of respondents were brand, product, and category managers (who were likely to have the most comprehensive and accurate viewpoints on advertising and sales promotion spending decisions for individual products). Other respondents had titles such as advertising manager, sales promotion manager, trade planning manager, and advertising research manager. Although the primary focus of our data-collection effort was on capturing the decision-making process of experienced front-line brand managers, we also interviewed high-level senior managers who supervised groups of products and brands (such as an executive vice president and division general manager) to ensure senior management representation and to provide as comprehensive a picture of the issues as possible. Many of the respondents had a high degree of experience, with 21 percent of them having more than 20 years ' experience in the business; another 74 percent had from 4 to 20 years of experience; the remaining 5 percent had fewer than 4 years of experience.
Lining up respondents proved to be one of the most challenging stages of the project. Brand and marketing managers were difficult to contact and most were initially reluctant to participate in research involving nearly an hour of their time. Contacts made at conferences were used in a snowballing technique to identify senior marketing personnel and brand managers at major packaged-good companies in the United States. We encouraged their participation and asked them to identify and invite brand and other marketing managers in their firm to be interviewed. Once these executives understood the nature and purpose of the research, they became willing, even eager, to participate in our study, given the importance of the topic to their firms.
Following standard interviewing procedures (McKracken 1988), we developed a series of broad, general questions about advertising and sales promotion spending decisions to guide our interviews, with more specific probes within each area. Importantly, the progression of the interviews was guided largely by the respondents. Approximately 45 minutes in length, each interview centered on three broad areas of questioning:
1. The decision processes and procedures used in the firm to set advertising and sales promotion spending levels.
2. Factors that influenced the allocation.
3. The evaluation of the effectiveness of the allocation.
These broad areas of questioning were refined on the basis of informal discussions and pre-testing with five marketing managers at a national conference. Interested readers can obtain the interview protocol by contacting either author.
One particularly sensitive aspect of our interviews, which we carefully considered before data collection, was talking with managers about practices which might have deviated from established norms of effective decision making. For example, if internal power and politics were influential in the spending decision, would our respondents be comfortable with acknowledging that fact and discussing it in some detail? To address these concerns, we paid particular attention to asking questions in such a way that respondents felt: (a) there was no judgment about their firm on our part and (b) that it was acceptable to acknowledge such factors. In addition, all respondents were assured of anonymity. Based on the responses we received in the interviews, we believe our qualitative method and questioning strategies were effective in encouraging managers to discuss sensitive budgeting issues.
The interviews were taped, and 289 pages of single-spaced transcripts were typed and systematically analyzed by both authors. First, the transcripts were read and checked for accuracy. Second, both authors independently re-read the transcripts and grouped common, recurring elements into categories. Each category consisted of an important, influential factor in the marketing communications budget allocation process and was supported with actual quotations from the interviews. The two authors then compared their two sets of categories, and similarities and differences were discussed and resolved. The result of this analysis was the reconstruction of key themes and issues across interviews, based on the qualitative data. These themes are reported in the following sections, relying on direct quotes by managers for support. As always with qualitative data, caution is warranted in generalizing our findings beyond our small, nonrandom sample. The extent to which the findings reported here are representative of a larger population requires quantitative estimation.
OVERVIEW OF THE BUDGETING DECISION PROCESS
Prior to discussing the specific factors that influence the budget allocation between advertising and sales promotion, we first describe three important characteristics of the budgeting process:
1. The nature of the decision process itself
2. The different perspectives of the people involved in it, and
3. The concerns about under-spending on advertising and over-spending on sales promotion
Managers first establish the overall strategic direction for the brand and set marketing objectives, ... Then, financial projections are made based on forecasts and objectives for the next year.
The nature of the decision process
Advertising and sales promotion budgets are set and allocated together as part of the annual brand marketing planning process (Low and Mohr, 1992). In many firms, a brand team approach to planning is used, involving managers from sales, trade marketing, manufacturing, accounting, and marketing research, as well as the brand manager, brand assistant, and group or category manager. Managers first establish the overall strategic direction for the brand and set marketing objectives, based on an extensive situation analysis. Then, financial projections are made based on forecasts and objectives for the next year. In addition, at this point, senior managers communicate financial expectations for the brand 's contribution to the corporate product portfolio. Third, the advertising and sales promotion budgets are set in order to achieve the objectives, relying on a combination of quantitative models and managerial judgment. The initial brand budget is then presented to a senior management panel who adjust and approve budgets for all brands in the company. Then, the plan and budget are implemented. Frequently, during the implementation phase, unplanned changes are made. Finally, the advertising and sales promotion budgets, once spent, are evaluated by comparing the achieved results with the objectives. This evaluation feeds into the planning sequence the following year.
The different perspectives of people involved in the decision
Inherent in the marketing communications budget allocation process is the conflicting nature of the accountabilities of the various people and functions involved.[1] Marketers want to see their brand thrive and prosper over the long term, but they must meet the quarterly and annual bottom-line profit expectations of senior management. The sales force is generally paid on volume sold. Advertising agencies are generally compensated by either a percentage of expenditures or a flat fee (neither of which is tied to brand volume or profit). Research is charged with offering insights available from data — and is often blissfully accountable only not to be wrong. These varying perspectives can set the stage for unresolvable value judgments in the budgeting process, many of which emerged in our interviews.
One important difference in perspectives that was frequently mentioned in interviews was the contrast between senior managers and brand managers. Brand managers formulate and implement plans for their individual brands to meet market needs, whereas senior managers seek to meet corporate needs. These two perspectives may not necessarily be in harmony. Indeed, given the specified role of the brand in the overall corporate portfolio, and modifications made by senior management during both the planning and implementation processes, brand managers may not have as much influence as they would like in setting the budget on a given brand. To some extent, the dynamics between brand and senior managers may be a function of corporate culture. In some organizations, such as Procter and Gamble, brand managers are expected to persuade and "push back" senior management, to find a way to get the funds they need. However, in other companies, senior managers have the final word in budgeting decisions, and brand managers would be jeopardizing their future with the firm if they pushed back (Decker, 1998).
Concerns about underspending on advertising and overspending on sales promotion
A frequently mentioned concern which weaves itself through most of our results was respondents ' overall dissatisfaction with the relative allocation between advertising and sales promotion. Brand managers are paid to make budget allocation recommendations that are in the best interest of their brands. The majority of managers we interviewed clearly expressed their desire to increase advertising and support their brand 's long-term equity. They also voiced their frustration with perceived over investments in sales promotion which they felt would lead to devalued brands and lower financial performance in the long run. Although this perceived imbalance did not hold true across all firms — some pointed out the many advantages of using sales promotions — there is much evidence, such as increasing retail concentration and a focus on short-term earnings (cf. Farris and Quelch, 1987) to support these concerns. Indeed, several of our respondents were quite explicit in their desire to see advertising given "equal opportunity" in the corporate environment and to off-set the pressures which tend to increase sales promotion expenditures with counterbalancing factors that would give advertising a better chance at the available pool of funds. We describe and discuss these competing forces in the next section.
FACTORS AFFECTING ADVERTISING AND SALES PROMOTION BUOGET ALLOCATIONS
Based on the insights from our respondents, we grouped our specific findings into three main categories:
1. The Good practices which managers felt contributed to an effective decision process.
2. The Bad—practices which were uncontrollable, frustrating realities of the decision process.
3. The Ugly—correctable flaws or problems in the decision process.
Although we treat these categories as being fairly distinct, they are very interrelated. By being more aware of the contributors and barriers to effective budget allocation decision making, managers may be able to better encourage or counterbalance their effects.
The Good
A number of managers shared with us aspects of their advertising and sales promotion budgeting decision that they felt were effective, especially those that gave advertising a more equal voice in the budget allocation process. These "best practices," divided into three main headings, include:
• Encourage risk in the organization. • Combine quantitative models with judgment. • Focus on brand differentiation.
Encourage risk in the organization The extent to which risk taking is encouraged or tolerated by the organization has an important influence on advertising and sales promotion budgeting decisions (e.g.. West and Berthon, 1997). If a firm wants creative ideas and approaches, it must offer its decision makers the opportunity to learn from the market and the freedom to make mistakes. Indeed, research on innovation suggests that penalizing people for creative ideas that do not work out is a strong way to stifle creativity (Amabile, 1983). Tolerating inherent risk and ambiguity that characterize advertising allocations—and the attendant consequences — may encourage more creativity in marketing plans.
However, as one brand manager commented:
The corporate culture makes the bottom line. If you go out on a limb and spend ten million dollars and don 't make the plan and don 't make the profit, you 're gone.
In this situation, the manager felt that advertising spending—with the accompanying possibility that it may not deliver the planned results—might be risky. In fact, as this manager said, not making "the plan" could lead to being fired.
In addition, many firms have a business climate that does not generally encourage risky, creative advertising ideas. One manager we interviewed commented:
The business environment, a kind of sociology, if you will, makes it very difficult for great advertising to come out today. Compared to years ago when owner-entrepreneurs would look at great advertising and say, "you 're right, I understand why that would be appealing."
The inherent riskiness of advertising spending compared to sales promotion spending further exacerbates this situation. For example, consumer and trade promotion outcomes are more easily measured than advertising outcomes. The following manager noted this when referring to the effects of sales promotions.
The research over the past ten years showing the sales spikes when sales promotion has been used has been a disservice to marketing. The heart of the marketing plan is consumer value and brand equity. We try to reward people who are adding value.
We expect that in risk-averse companies, managers will allocate relatively more dollars to sates promotions and less to advertising. Given the inherent creativity involved in advertising decisions, as well as the inherent ambiguity that surrounds them, firms may need to take a good hard look at their corporate culture to assess whether or not it penalizes advertising because it is more risky. A senior marketing manager we interviewed felt that one way to deal with this problem would be to make advertising seem less risky, as this quote illustrates:
It 's stupid to go out and say, "look at how creative we are." I think what is smart to do is get a bunch of creative people and say, "now we are the advertising agency that doesn 't have any guys with beards working at it. They look like they all work for IBM. They think and act like they all work for IBM. They come up with the same creative ideas. But in a way that is perceived as safer and more left brain, more logical, more rational."
Given the inherent risk-aversion in most companies today, this approach —- where advertising and other long-term communications efforts are made to appear less risky by supporting creative, brandfranchise-building ideas with research results and by demonstrating their short-term effects — may be useful.
Combine quantitative models with judgment The increasing sophistication and use of marketing information (such as single-source and scanner data) and computer systems have the potential to assist managers in setting and allocating their marketing budgets. In our interviews, firms who developed and used modeling techniques to guide the allocation decision appeared to be more successful at attaining a more "optimal" budget allocation. As these two managers explained:
We happen to have a promotional analysis system provided for us by Nielsen, based on actual consumer sales using supermarket scanner data, which shows that in our product category, feature pricing wasn 't generating incremental sales. We learned that we didn 't need to be spending those dollars there and looked for other ways to spend them.
We had McKinsey do a study for us which showed us that we are wasting our money just putting dollars out there for the trade. We were getting trade customers to buy, but we weren 't getting consumer pull-through. We were loading warehouses.
These comments illustrate that, interestingly, the reliance on hard marketing information, which many believe can bias budget allocations to promotional tools with easily measured results, does not necessarily lead to more sales promotion spending. Indeed, depending on the specific results of this kind of analysis, such data may work against allocating dollars to consumer and trade promotions. Brand managers may also need to work harder to get quantitative support for their advertising programs. For example, copy testing comparing this year 's campaign to last year 's might be an effective way to get more objective assessments of advertising into the process.
Despite the increasing reliance on quantitative marketing models, our respondents noted the tendency of their spending decisions to be based on gut feel and intuition:
What gets a lot of support simply depends on how much people like [the ideas]. How much senior managers think: "boy, that 's a great (or lousy) ad" — despite the fact the lousy ad might be proven to be effective. It 's gut reaction and intuition. There 's a massive amount of gut reaction.
Clearly, managerial experience can be valuable when it is based on sound judgment and intuition. While analytical models are useful, managers often rely on insights based on personal experience in order to adjust the information provided by the models. Indeed, prior research shows that combining output from analytical models with managerial judgment and intuition can lead to the best decisions (Blattberg and Hoch, 1990).
In the advertising area in particular, managers have a tendency to rely on judgment and intuition: results from advertising expenditures are perceived as being more difficult to quantify than those from increased promotional spending. Further, budget allocations to advertising are often heavily influenced by the anticipated quality of the advertising creative message, which in many firms is a subjective decision as well. Our results show that allowing more experienced managers to use their well-trained judgment may actually result in more effective budgeting decisions, as illustrated by this manager:
I think experienced managers tend to be more willing to take risks on the fact that advertising will have an impact.
Some would go so far as to argue that brand equity and quality creative are a brand manager 's key responsibilities.
Yet, other managers express a continued desire for better quantitative techniques to isolate the sales effects of advertising:
I would like some kind of model which would evaluate the incremental sales contribution of advertising spending. That 's the toughest of all. Is advertising really contributing to sales, and what part of the brand 's sales increase can be attributed to advertising? And how do we know that $20 million in advertising is enough? Or too much? What is the optimal spending level? Those questions are still unanswered. We need more science in it.
Increasingly, such quantitative tools are available from a variety of research firms. Marketplace modeling of advertising, consumer promotion, and trade promotion is being used to guide optimal marketing spending at large packaged goods companies. Clearly, managers should continue developing expertise and comfort in using more quantitative tools, in addition to their expert judgment in making budget decisions.
Focus on brand differentiation. The power of the brand 's marketing idea is the strength of a product 's differentiation, competitive advantage (both real and perceived), or unique selling proposition. A common theme in our interviews was that brand differentiation strategies facilitate a more balanced advertising and sales promotion budget.
Next year they 're talking about cutting our trade budget. And I really don 't have a problem with it. It seems like the message is more powerful than what the trade dollars are doing . . .
And our trade customers are selling more of the 30-35% margin [based on effective advertising]. That 's a heck of a lot more dollars in their pocket versus the $1.20 a case that they would get three times a quarter [on a trade promotion].
And, as another brand manager said:
To the degree that we can be persuading consumers to buy our products on the strength of ideas, as opposed to the lowness of the price, that 's a good thing. The people who win are those who have added value through consumer-focused communi- cations and not through trade deals.
These quotes illustrate the importance of basing allocation decisions on the power of the brand 's marketing idea: a strong brand provides a convincing rationale for budgeting and allocating a greater amount to advertising. This issue is clearly related to brand equity, a topic to which managers in our interviews were sensitive:
Advertising was so minimal that our sales kept dropping, even though we put a lot of money into trade promotion. We 've done more advertising now than in the past five or six months because we realized we cannot continue this trend of de-emphasizing advertising and using trade promotion. We just don 't have the brand equity we used to.
But the mold had been cast — and since then, price promotion has been a major problem in this industry. At the height of the buy one-get one free activity, the category took its worst plunge up to that point, and the category went down 10%. And we said to ourselves, what 's going on? And what we found out is the message we were giving the consumer is: "This product isn 't as good as it used to be — it 's not worth what it used to be." Whether the quality had actually gone down is irrelevant, it 's the perception.
The importance of the strength of a brand 's message and brand equity in the allocation decision deserves reiterating: brand equity and quality creative ideas are important ingredients in budget allocation decisions. Some would go so far as to argue that brand equity and qualify creative are a brand manager 's key responsibilities.
To be sure, advertising is vital to brand equity. However, advertising, per se, is not a sacred cow that should necessarily be part of every year 's marketing allocation. Monies should be allocated to advertising only if it has a clearly defined role within that year 's strategy for meeting a brand 's goals. Without a USP, important news, or a strategy to sustain brand-image development, advertising budgets might best be otherwise allocated. While this reality may be difficult for a brand manager to accept, it may be the best decision for the brand, as well as for the company as a whole.
The Bad
For many marketers, there are uncontrollable, frustrating realities in the budgeting process, far removed from the "best practices" notions detailed previously. For the most part, managers were able to adjust their decision making in ways that allowed them to cope with (rather than change) these frustrations and minimize their impact on effective decision-making. Three factors in this category emerged from the interviews: • retailer power • short-term focus • top-down influence
Retailer power relationships with channel members clearly are tied to a firm 's relative spending on advertising or sales promotion, as witnessed by Procter and Gamble 's difficulties with retailers in implementing its every-day-low-price policy. Our interviews were replete with specific examples of trade members ' "strong-arming" manufacturers, threatening to drop product lines without more spending on trade promotions. For example:
When you look at the leverage between increases in volume as a source of income gains for them (retailers) versus increases in their margins stemming from increased allowances, the thing is highly leveraged toward allowances. They 're able to get a whole lot more money on the table more quickly by extortion in some instances than by necessarily working as partners with us in moving the business forward and trying to move additional volume.
Managers we interviewed are working with retailers to change this situation— even if the retailers themselves are not. Managers handled this by working with retailers in making trade promotion dollars more effective by forming partnerships to find win-win solutions. Such partnerships allow the manufacturers to work with the retailer in more creative ways that can be beneficial to both (Mohr and Low, 1993). Some of the solutions used by participants in our study included measuring the effectiveness of promotional activities for retailers, planning joint promotions that are effective for both parties, category management, and even paying retailers for long-term growth in important categories. In such cases, relationships may become more cooperative and less antagonistic. Trade promotion dollars may be less important in such situations since the relationship will be built on trust and cooperation rather than on power and financial incentives like slotting allowances. As trade partnerships are formed, with an increase in communication and the establishment of mutual objectives between manufacturers and retailers, trade-directed promotion may involve more time and less cash. As the following manager pointed out, the short-term nature of trade promotions may actually work against forming partnerships that necessitate a long-term focus and commitment from both partners:
[Partnerships] have been held up or held back due to short-term decision making . . . slotting [allowances] can get in the way of forming long-term partnerships with our retailers.
Short-term focus. Firms in today 's business environment grapple with the need to deliver quarterly results that show steady improvement. The quick turnover in brand management, where managers are promoted to a different brand each year or two, puts extreme pressure on brand managers to deliver results or (at the extreme) lose their jobs. This pressure clearly affects marketing communications spending decisions:
Brand managers ' careers are based on making things happen quickly. . . . You have your annual profit goals to make and when you 're not making your volume goal, it 's an easy target to take money from advertising.
Financial pressure encourages people to build the numbers around achieving a quick profit, rather than saying, "Am I building a plan that is beneficial to the long-term image of the brand?"
It is highly unlikely that somebody who is being measured monthly or quarterly is going to take an enlightened view of a long-term profitable marketing plan.
Brand people have to show progress — they have to sell more each quarter than the year before. The easiest way to do that is through trade promotion.
Given these short-term pressures at the brand level, one might hope that senior management is looking out for the long-run interests of the brand. However, at least one example shows that senior managers are not immune to these short-term pressures either:
Our president is responsible to shareholders and the banks, and he feels pressure in that environment ... there is no question that in the allocation of the actual marketing dollars, that the short-term focus to not only make the quarter, but make the month, has driven some of our thinking and in fact it 's driven more of our contingency planning. You go into a fiscal year, you develop a budget, and the way budgets are reallocated is definitely more in favor of making and achieving short-term goals.
The firm 's compensation system is also an important contributor to this short-term mentality. While there are many compensation issues related to advertising spending decisions, one that emerged from our interviews involved the discrepancy in evaluation systems between sales and brand managers. Those firms where compensation systems are being updated to reflect uniform profitability goals across sales and marketing are more successful in achieving the desired, strategic mix of sales promotion and advertising.
Courage and discipline were also frequently mentioned in the attempts to overcome short-term thinking.
We need to discipline ourselves to have less of an emergency orientation. It requires discipline and foresight to get through the short term and not be tempted to spend inappropriately to address immediate problems.
It 's just a matter of discipline and getting that selling proposition, the creative to the level that it really is going to be effective and then having the intestinal fortitude to stick with it.
Top-down influence. In many companies, senior managers influence the budgeting decision in ways that make sense at a corporate level, given their broader responsibilities and concerns. However, their broader concerns may necessitate tradeoffs that can be perceived as damaging to an individual brand. We recognize that this perception may stem from the bottom-up perspective of the brand managers and some of the other respondents whom we interviewed (who may resent the involvement of management in "their" budgeting decisions). However, the perception that senior managers ' influence prevented effective decision making at the brand level was so prevalent in our interviews, we feel it deserves mentioning here as a frustrating reality of the decision process. As one manager pointed out, negotiating a budget with senior management can be disappointing:
Managers can do little to prevent top-down influence, but they can deal with it by making it clear to senior managers what the potential long-term consequences of such decisions can be.
It 's top-down in terms of total dollars and then it tends to be fairly iterative in terms of the allocation of those dollars between advertising, consumer, and trade , . . Generally, we 're given a total number from the top. We develop a program, it gets kicked around between our vice-president and the president of the company. It comes back and then we go back and forth until we get a plan that I 'd like to say everybody 's happy with, but really it means that the guy at the top is happy with.
This quote illustrates a common concern voiced across a number of interviews — that budget numbers are coming down from the top, from managers who are removed from the brand 's business and who do not rely on a careful analysis of objectives and quantitative evidence in making their decision. Indeed, the input of senior managers may not be subject to the same rigorous analysis on which the original allocation was based: The organization functions in two very different ways. The people on the lower levels try to be very analytic and figure out the best recommendation. Senior managers operate much more judgmentally. It is not scientific.
While not explicitly stated by our respondents, the implicit message is that brand managers believe that their own judgment can be an asset in the budget/allocation decision process because it is typically complemented with logical reasoning and research results, whereas senior managers ' use of judgment is viewed as problematic.
Frequently, senior managers ' involvement in the budgeting process comes during the implementation phase, when they react to financial pressure and dictate changes to the budget which deviate significantly from the plan. The Vice President of our product group was getting heat from upstairs to "get out of the business if you 're not going to make money on it." He decided to cut media. It went from $13 million at one point all the way down to $2 million. Our New York agency threw up their hands and said "forget it, we 're not going to do any more plans." We had probably fifteen plans, which was terrible. I thought we should have paid them some kind of penalty.
Managers can do little to prevent top-down influence, but they can deal with it by making it clear to senior managers what the potential long-term consequences of such decisions can be. The degree to which they can do so will depend on the corporate culture and expectations of brand managers in the firm.
The Ugly
This final set of factors includes the flaws or problems in the advertising and sales promotion budgeting decision process that are more correctable in nature than the previous set. Many managers have found ways to counteract the problems presented below, and we discuss these ideas as well. Three such factors/practices came out of our study: • political sales force influence • historical inertia • ad hoc changes
Political sales force influence By its very nature, organizational decision making is a political process (Piercy, 1987). A number of managers interviewed suggested that such political behavior is commonly exhibited by the firm 's sales force when advertising and sales promotion spending decisions are being made. As one manager observed: You 've got a huge political force inside every company that has a sales force. For example, everybody knows that trade promotion is bad. Coupons we feel are bad and so forth — short term, doesn 't build equity and all that. On my brand we proposed moving our trade budget down. I had my boss 's approval to do that, and we took it to a sales meeting, and the sales people said "we don 't want to do that," and my boss said, "oh gee, I guess we better not do that," and therefore, it was never done.
The political behavior of members of the sales force often takes the form of informal, casual conversations in hallways, cafeterias, etc. The following manager 's comments illustrate this well:
The fact of the matter is that, because sales — unlike say, the consumer promotion agency or the advertising agency — lives here in the building ... it 's just that they 're here. It 's the power of proximity.
... including the sales force in the formal planning process might be an important factor in minimizing the impact of political influence in budgeting decisions.
The political pressure of the sales force to emphasize sales promotion is not a surprising phenomenon. However, several of the managers with whom we spoke talked about how to strategically use the sales force to help reduce sales promotion spending. Many firms use a brand team approach to marketing planning which typically includes the direct, formal involvement of a representative of the firm 's sales force—a group which has a particular interest in the amount of the marketing budget allocated to sales promotion. Although one might expect that in such instances, the sales force representative may attempt to maintain or increase the budget allocation to trade promotion, the depth interviews revealed that when sales people are included as a formal member of the brand team, they often exhibit greater commitment and less antagonism to the resulting allocation (regardless of the relative spending on sales promotion) than when they are not formally involved. As one product manager explained:
In terms of working through the plan, our sales counterpart worked with us step by step through the analysis. I would characterize his involvement as a kind of devil 's advocate, in terms of helping us think through the right questions to be addressed analytically. But in terms of his involvement, being that it was up front, and he was part of the process, he explicitly bought into the conclusion at the end point.
This latter insight shows that actually including the sales force in the formal planning process might be an important factor in minimizing the impact of political influence in budgeting decisions. If the sales manager participates and believes in the process used to allocate budgets, she or he may have greater commitment to implement the plan, even if it means a reduced level of spending for trade promotion.
Historical inertia. One factor that emerged strongly from our interviews was the effect of historical precedent on a firm 's spending decisions. To a large extent, the trend toward sophisticated modeling and objective-task ("zero-based") budgeting led us to initially underestimate the importance of the effect of historical inertia. However, the managers we interviewed repeatedly mentioned the impact of the previous year 's advertising and sales promotion budget in the decision process.
In the absence of good hard information that gives people a road map on how to allocate resources, they will do in most cases what has historically been done, with a bit of intuition thrown in. And that, of course, is tempered by just how available resources are.
Clearly, the number one factor is precedent. 1 think everybody enters into the process by looking at what was the relative allocation to advertising, consumer promotion, and trade promotion historically. And that forms the benchmark.
If you vary much from the historical you have to prove it.
We had a number in mind going in that we had developed in the prior year as far as what we needed, and then from that point, you look at either going higher or lower based on the previous year 's number.
Trade promotion spending was a big part of that precedent:
Trade 's a given, and every time you give in and increase your trade spending it never comes back, it never goes away. That 's a cost of doing business you build in and that 's where you start.
Some managers were wary of the reliance on historical precedent:
Temper that [the allocation] with reason — history and reason are different. History isn 't always reasonable.
Even when managers can "prove" a reason to deviate from historical precedent, senior managers might not follow it. For example, one of our managers had results from a controlled experiment that showed more effectiveness from a radically different allocation than historical precedent. But, the senior managers would not buy into the results and would not change the allocation.
Some managers noted a desire and effort to better match allocations to a brand 's goals for the coming year, rather than relying on historical precedent. For example:
Our plan is still one of building awareness, high awareness for the brand because it is relatively new. But at the same time we needed to build trial. Our repeat purchases are very high on this brand. Once a consumer tries it and really likes it, he comes back and buys not only the product, but he buys in greater quantities. So our objectives are real clear: a lot of awareness and a lot of trial. So we put more money into media and the percentage of promotions decreased.
Managers who reported a strong influence of goals and objectives for the brand on their spending decisions generally felt the resulting allocation was more "optimal." This is a very important point, because setting objectives can help to overcome some of the barriers to effective decision-making in setting and allocating advertising and sales promotion budgets.
Ad hoc changes. A number of managers expressed concern with changes made to their advertising and sales promotion budgets during the implementation phase. These modifications are often made quickly in response to unexpected developments in the marketplace, without regard for the long-term consequences of such changes. The following quotes capture this:
In a sense it 's reactionary. You go into the year with a plan that 's really ideal in some respects. But as you go through the year, if you 're not making your plans, you have to spend less money to compensate for the shortfall. If I then cancel a trade or consumer promotion, my sales will even fall shorter. If I don 't run the advertising, sales may not be affected too much since advertising is more long-term and I can pick it up again later.
They are constantly slashing the advertising budget to pay for all the additional trade deals. You see a lot of it. They will come out with a certain advertising budget and keep cutting it down, down, down.
This manager felt that not much could be done about ad hoc changes. It is the nature of business and also illustrates well the point of view of senior management:
Flexibility is a central part of managing brands. It 's fire drills, it 's reality. There 's lots of things you have to be prepared for. You have to realize that any big company is a portfolio of different cash streams. If one cash stream goes down, the tendency is to portfolio manage and ask other people for more. That happens all the time.
However, changes made to the original brand plan in mid-year can compromise its original intent:
The easiest budget to put together from a strategic standpoint is the one going into the year. It 's maintaining that budget and maintaining the strategic integrity of that budget that is most difficult.
While difficult, maintaining the "strategic integrity" of carefully planned budgets is possible by including contingency plans and anticipating potential bumps in the road.
CONCLUSIONS
The advertising and sales promotion budgeting process conhnues to be a perplexing issue for advertising and brand managers. Our research was motivated by a desire to better understand the factors that affect the allocation between advertising and sales promotion. Most of the managers we interviewed felt that institutionalized pressures led to a greater proportion of their marketing budgets being spent on sales promotions than they would have liked and wanted to see advertising given "equal opportunity" in the corporate environment.
Effective advertising budgets are conceived in a strategic planning framework which includes an integrated marketing communications philosophy.
The results of our study have implications for at least three groups of people: brand managers, advertising agencies, and marketing researchers. The primary implication is that brand managers should use a comprehensive marketing strategy to guide their marketing communications budgeting decisions and avoid the piecemeal approach of making advertising and sales promotion spending decisions independently. Effective advertising budgets are conceived in a strategic planning framework which includes an integrated marketing communications philosophy. Such an approach allows managers to make more direct trade-offs in allocating budgets. Based on our results, managers who desire a more equitable advertising-sales promotion budget allocation should also:
1. Use a brand team approach - involve managers from many departments in budgeting decisions.
2. Build contingency plans into the budget allocation which anticipate potential mid-year or fourth-quarter changes.
3. Consistently evaluate the performance of past programs by comparing outcomes to the intended strategic objectives.
4. Focus on long-term, overall performance.
Advertising agencies can also benefit from our research findings. For example, account executives could work closely with clients to:
1. Focus on building stronger brand equity, adopting a more holistic view of clients ' organizations and marketing strategies.
2. Center the advertising planning process on goals for the coming year (versus inertia or historical precedent) such as specific awareness or sales increases.
3. Be aware of the influence of sales, and channel members on the allocation decision.
4. Adopt a more strategic point of view in helping clients determine the amount to spend on advertising and sales promotion programs. More advertising may not always be the solution, depending on the brand 's positioning strategy.
While some of these issues are outside of an ad agency 's responsibility, advertising executives can help clients to be aware of the potential influence of such factors. By making clients aware of these hurdles to effective decision making, behavior can be changed.
The third group who can benefit from the results of this study is marketing researchers. As pointed out in several of our interviews, marketing researchers continue to develop sophisticated tools to better explain and predict sales response to advertising and sales promotion spending. Our findings suggest that knowing the "optimal" amount to spend on advertising is only one piece of the budget allocation puzzle. An equally important piece is creating a corporate environment that allows the desired level of spending to occur. As they develop analytical tools to discover the optimal amount for advertising and sales promotion spending, marketing researchers should realize the hurdles involved in getting the optimal spending amount approved and implemented. Models could be developed which incorporate managerial judgment, corporate objectives, and long-term outcomes in order to provide a more realistic and useful decision tool.
Organizational realities are a major barrier in effectively allocating advertising funds, given the pressures outlined in our study. By actively dealing with these pressures head on, managers can significantly improve the way they determine their advertising and sales promotion budgets.
GEORQE S. LOW is an assistant professor in the marketing department of the M. J. Neeley School of Business at Texas Christian University in Fort Worth, Texas. His Ph.D. in marketing is from the University of Colorado-Boulder. He also received an M.B.A. from the Ivey School of Business, University of Western Ontario, and a B.A. in advertising from Brigham Young University. He spent four years as a media planner with MacLaren McCann Advertising (Canada). His research focuses on integrated marketing communications management and has been published in the Journal of Marketing Research, the Journal of Retailing. Marketing Management, and the Marketing Science Institute 's working paper series,
JAKKI J. MOHH is associate professor of marketing at the University of Montana. She has a Ph.D. (1989) in business marketing from the University of Wisconsin. Prior to her position at the University of Montana, Professor Mohr served on the faculty at the University of Colorado, Boulder (1989-1997) and worked in advertising in Silicon Valley for Hewlett Packard 's Personal Computer Group and TeleVideo Systems. Her research has been published in the Journal of Marketing and the Strategic Management Journal, and other journals.
REFERENCES
AILAWADl, K. L., p. W. FARRIS, and M- E. PARRY. "Share and Growth Are Not Good Predictors of the Advertising and Promotion/ Sales Ratio." Journal of Marketing 58, 1 (1994): 86-97.
AMABILE, T. The Social Psychology of Creativity. New York: Springer-Verlag, 1983.
BIGNE, E. "Advertising Budget Practices: A Review." Journal of Current Issues and Research in Advertising, 17, 2 (1995); 17-33.
BLATTBERG, R., and S. HOCH. "Database Models and Managerial Intuition: 50% Model + 50% Manager." Management Science 36, 8 (1990): 887-99.
COX DIRECT. 19th Annual Survey of Promotional Practices. 1997.
DECKER, C. Winning with the P&G 99: 99 Principles and Practices of Procter and Gamble 's Success. New York: Pocket Books, 1998.
FARRIS, P. W., and J. A. QUELCH, "In Defense of Price Promotion," Sloan Management Review 29, 1 (1987): 63-69.
LOW, G. S., and J . MOHR, "The Advertising-Sales Promotion Trade-Off: Theory and Practice." Marketing Science Institute Working Paper Series, #^2-127, Cambridge. MA, 1992.
MCARTHUR, D. N., and T. GRIFFIN. "A Marketing Management View of Integrated Marketing Communications." Journal of Advertising Research 37, 5 (1997): 19-27.
MCKRACKEN, G. "The Long Interview." in Qualitative Research Methods. Volume 13. Newbury Park, CA: Sage Publications, 1988.
MOHR, J., and G. S. LOW. "Escaping the Catch-22 of Trade Promotion Spending." Marketing Management 2. 2 (1993): 30-39.
PlERCY, N. F. "The Marketing Budgeting Process: Marketing Management Implications." Journal of Marketing 51, 4 (1987): 45-59.
ROBINSON, P.J. and D.J. LUCK. Promotional Decision Making: Practice and Theory. New York, NY: McGraw-Hill, 1964.
SCHILLER, Z. "Make it Simple." Business Week. September 9, 1996.
SCHULTZ, D. F., and P. J. KITCHEN. "Integrated Marketing Communications in U.S. Advertising Agencies: An Exploratory Study." Journal of Advertising Research 37, 5 (1997): 7-19.
STEWART, D. "Allocating the Promotional Budget: Revisiting the Advertising and Promotion-to-Sales Ratio." Marketing Intelligence & Planning 14, 4 (1996): 34-38.
STRANG, R. A. The Promotional Planning Process. New York, NY: Praeger, 1980.
WEST, D,, and P. BEKIHON. "Antecedents of Risk-Taking Behavior by Advertisers: Empirical Evidence and Management Implications." Journal of Advertising Research 37, 5 (1997): 27-41.
-----------------------
[1] Our thanks to an anonymous reviewer for the insights about these various roles and tensions.
References: AILAWADl, K. L., p. W. FARRIS, and M- E. PARRY. "Share and Growth Are Not Good Predictors of the Advertising and Promotion/ Sales Ratio." Journal of Marketing 58, 1 (1994): 86-97. AMABILE, T. The Social Psychology of Creativity. New York: Springer-Verlag, 1983. BIGNE, E. "Advertising Budget Practices: A Review." Journal of Current Issues and Research in Advertising, 17, 2 (1995); 17-33. BLATTBERG, R., and S. HOCH. "Database Models and Managerial Intuition: 50% Model + 50% Manager." Management Science 36, 8 (1990): 887-99. COX DIRECT. 19th Annual Survey of Promotional Practices. 1997. DECKER, C. Winning with the P&G 99: 99 Principles and Practices of Procter and Gamble 's Success. New York: Pocket Books, 1998. FARRIS, P. W., and J. A. QUELCH, "In Defense of Price Promotion," Sloan Management Review 29, 1 (1987): 63-69. LOW, G. S., and J . MOHR, "The Advertising-Sales Promotion Trade-Off: Theory and Practice." Marketing Science Institute Working Paper Series, #^2-127, Cambridge. MA, 1992. MCARTHUR, D. N., and T. GRIFFIN. "A Marketing Management View of Integrated Marketing Communications." Journal of Advertising Research 37, 5 (1997): 19-27. MCKRACKEN, G. "The Long Interview." in Qualitative Research Methods. Volume 13. Newbury Park, CA: Sage Publications, 1988. MOHR, J., and G. S. LOW. "Escaping the Catch-22 of Trade Promotion Spending." Marketing Management 2. 2 (1993): 30-39. PlERCY, N. F. "The Marketing Budgeting Process: Marketing Management Implications." Journal of Marketing 51, 4 (1987): 45-59. ROBINSON, P.J. and D.J. LUCK. Promotional Decision Making: Practice and Theory. New York, NY: McGraw-Hill, 1964. SCHILLER, Z. "Make it Simple." Business Week. September 9, 1996. SCHULTZ, D. F., and P. J. KITCHEN. "Integrated Marketing Communications in U.S. Advertising Agencies: An Exploratory Study." Journal of Advertising Research 37, 5 (1997): 7-19. STEWART, D. "Allocating the Promotional Budget: Revisiting the Advertising and Promotion-to-Sales Ratio." Marketing Intelligence & Planning 14, 4 (1996): 34-38. STRANG, R. A. The Promotional Planning Process. New York, NY: Praeger, 1980. WEST, D,, and P. BEKIHON. "Antecedents of Risk-Taking Behavior by Advertisers: Empirical Evidence and Management Implications." Journal of Advertising Research 37, 5 (1997): 27-41.
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