MKTG 463

ADVERTISING MANAGEMENT

Application Exercise #2 - Budgeting for Advertising

Learning Objectives:

1. To be able to calculate an appropriate advertising budget using three common budget allocation techniques
2. To understand the strengths and weaknesses of these techniques and the assumptions behind the decisions used in their calculation
3. To be able to assess the appropriateness of the budget allocations set by these techniques based on the companys market environment
4. To be able to choose a final budget allocation amount based on evidence and evaluation, rather than an arbitrary number

Instructions:

NOTE: This is an INDIVIDUAL assignment.

Assume that you are the Vice President of Marketing for SuperSpy, Inc., a manufacturer of a computer virus detection software package. You have two competitors in the marketplace, McAfee and Norton. Each company sells a similar software package to consumers through retailers at an average price of $30. You are planning your advertising budget for 2013. Following are the data for gross sales and advertising expenditures in 2012 for your company and your competitors, as well as gross sales projections for 2013.

SuperSpy McAfee Norton

2012 $ Gross Sales: 14,400,000 29,820,000 33,600,000

2013 $ Gross Sales (projection): 16,000,000 37,000,000 45,500,000

2012 $ Advertising Budget: 432,000 1,491,000 2,016,000

To make your final decision, you will first calculate your 2013 advertising budget for SuperSpy using variations on several techniques, including percentage of sales, share of voice, and the objective-task method, and then you will compare the results across techniques and variations.

Deliverable:

Answer the following questions to complete these calculations, assess your options, and make your final decision. Save this document using the naming convention in the course instructions, and type your answers directly into this document in the space provided for each question.

NOTE: For calculation problems, be sure to SHOW ALL WORK!

• A zero grade will be assigned for any answer that does not show the calculations by which that answer was derived, even if the answer shown is correct. Partial credit will be given, but only if the work shown is clear and readable.

Grading Criteria:

You will be graded on:

1. The accuracy of your inputs, calculations, and resulting mathematical answers.
2. The depth of thought and application of knowledge from the lecture and text in answering the questions asking you to assess and discuss your findings.
3. The quality of your arguments in supporting your final decision.

Questions:

Percentage-of-Sales Method

1. Your first step in the percentage-of-sales method is to determine the right percentage to apply. One approach is to use company experience. So first, calculate what percentage of sales SuperSpy used for advertising in 2012 to determine the companys historical percentage.

2. Now, using that historical percentage, estimate your 2013 budget based on your 2012 gross sales, using the percentage of sales method.

3. Did your budget go up, down or stay the same in 2013 compared to 2012? Do you think this is the right budget for your company, based on the data shown? Why or why not?

4. Next, using that same historical percentage, estimate your 2013 budget based on your projected 2013 gross sales.

5. What is your assessment of this budget amount, compared to the amount you calculated in question #2 and compared to your competitors spending?

6. Next, you want to determine whether or not the percentage SuperSpy has used in the past is an appropriate percentage, so youre going to compare it to the industry average. So, calculate the average percentage-of-sales used for advertising across the industry in 2012 (include all three companies - SuperSpy and its two competitors - as the entire industry.)

7. When you compare SuperSpys historical percentage-of-sales to the industry average, do you think SuperSpys historical percentage is too low, too high, or just right? Why or why not?

8. Use the industry average percentage to calculate SuperSpys 2013 budget based on its 2012 sales.

9. Use the industry average percentage to calculate SuperSpys 2013 budget based on its projected 2013 sales.

10. Youve probably noticed that the budget estimates, from the lowest in question #2 to the highest in question #9, are quite different. If you were to decide to use the percentage-of-sales method to set your 2013 budget, which estimate do you believe is best? Defend your choice.

Share-of-Voice Method

11. Before you can apply the share-of-voice method, you have to determine your current market share relative to the industrys total sales. So, first, calculate SuperSpys market share of the total industry based on 2012 gross sales.

12. Next, calculate SuperSpys projected market share in 2013 - is SuperSpy expecting to increase, decrease, or maintain its market share in 2013 compared to 2012?

13. Now calculate SuperSpys share of voice for 2012, based on the 2012 advertising budgets of the entire industry.

14. Is SuperSpy currently overspending, underspending, or spending the right amount on advertising, when you compare its market share to its share of voice? Defend your answer.

15. If SuperSpy wants to use the share-of-voice method, and it sets a goal of maintaining its current market share, how much money should the company allocate for its 2013 advertising budget? (Round the market share estimate to the nearest half percentage, and assume that the 2013 industry advertising total will be the same as its 2012 amount.)

16. Assume your managers have given you a goal of increasing SuperSpys 2013 market share beyond its current sales predictions - what would your advertising budget need to be if you wanted to gain a 25% market share?

Objective-Task Method

17. Your final technique will be the objective-task method. You will work through your strategic planning for the company and for your advertising, and will set objectives of achieving awareness of SuperSpy among 60% of your target market by the end of 2013. After setting your objectives, you work with your advertising agency to develop an advertising campaign and media plan to reach at least 75% of your target audience with at least 10 repeated exposures to your advertising. Your advertising agency estimates that you will need to produce a campaign that includes magazine, newspaper, radio, online and retailer cooperative advertising, and they offer you the following cost estimates (these are total annual costs):

Advertising Production Costs Media Space Costs

Magazine $12,000 $80,000

Radio $25,000 $150,000

Newspaper $16,000 $110,000

Online $15,000 $170,000

Cooperative $ 8,000 $ 56,000

Use these estimates to calculate your objective-task advertising budget for 2013.

Summary - The Final Decision:

18. Make a final decision on a budget amount and explain how you arrived at that figure. You can choose to use any one of these techniques, or base your decision on some combination of them. Explain your reasoning behind your choice.