Wednesday, March 18, 2009

To Spend or not?

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During difficult times economically, we can not blame the director of marketing who wants to reduce advertising costs or to extract a higher value from them.Meanwhile, cutting massively the advertising spending is not an intelligent strategy. For an effective promotion, companies must invest in the right brands, in the right areas and send exciting messages through appropriate channels.

Few of the companies that have a portfolio of brands designed for a variety of market segments for several regions, differentiate their investments based on strategic priorities.The traditional process of establishing a marketing budget suffers from 3 drawbacks. First, they allocate a limited importance to the major differences between the intensity and sensitivity of appearing between market segments and different regions. Secondly, they do not recognize the important choices that have to be made regarding the growth, the development and strategies for each brand, market segment and region. Thirdly, the market share and the impact of investments in advertising on profits are not measured. For this reason, target market shares are not related to the advertising budgets.

For a better allocation of investment in advertising is essential a zero-based budget approach.This approach has the following practical observations:

- Minimum investment levels. Investment in advertising under the minimum level are usually ineffective and is it better not be made at all in this case.

- The costs of advertising. This can vary considerably from one category to another. Can vary from 5% of income up to 45% of revenue.

- The answer to advertising categories. The effects of excess investment in maintaining market share in one segment or another. The investments needed to gain 1 percent of the market share in one year, for example, can vary from 2 to 4 times the level of maintenance.

- Market share of the company. The necessary investments in advertising made in order to maintain the market share (maintenance level) are directly related to the scale and the competitive position. When the relative market share doubles, for example, the investments needed in advertising to maintain the market share may be reduced by 30%.

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In case of a competitive position that is stronger, belonging to a market with massive growth and the existence of some beneficial conditions, the company could consider an investment strategy.First, there should be a framework of solid innovations, together with other elements of the marketing mix to support the growth.Secondly, the consumers of the market segment should be quite sensitive to advertising, so that the additional investments be able to transform into an increased market share. If these conditions do not exist, a strategy developed to maintain the market share would be the best solution.

If a brand has a weak position on a market which recorded a growth or a contested position on a market with a lower growth, the company should invest in order to gain a market growth or to collect.If the intensity of advertising is significant on the relevant market segment, a collection strategy is preferable.Finally, a collection is suitable if a brand has a weak position on a market which registered a low growth.

This methodology can be a good tool to support a more aggressive difference of the investment levels, for a portfolio of brands designed for a variety of market segments and regions. Companies that have used this approach have forceful released almost 20% of investments in advertising.They could, instead, focus their spending to the areas where they were having a greater impact.

However, in order to implement this approach, the companies must be prepared to make some fundamental changes:

- Establishment of an evaluation based on the facts of the total advertising expenditure in terms of market share and profit impact.

- Shift from budgeting aggregates and the free discussion based on facts on the allocation of advertising expenditures (explicit involvement of the general manager and financial manager).

Before deciding to distinguish the levels of investment, the company should allocate the best people for the activities of collecting and maintaining the brand. In many companies, managing brands is perceived as being beneficial for a career manager. For this reason, most brands and segments are identified as having growth opportunities, even if the featured profitability of the strategies of maintaining and collecting can be much higher. The fact is that the defense position of leadership on the market, using limited resources and maximizing profit on a market that fails, having almost no resource, often requires a higher level of effort and talent than to grow the market share in an expanding market, using unlimited resources.

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Finally, it might be the right moment to evaluate the contracted advertising agency. The relationship between a client and an advertising contracted advertising agency follows also a life cycle, the inevitable pattern of growth and decline. It seems that your agency lost its original booming? Maybe it became too big?Does it produce sad campaigns, that don't excite anyone?Emphasis goes to collateral services, in order to hide the agency's creative bankruptcy? If you recognize the signs, it might be time to have a new start!