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How to set an effective media budget Hamish Pringle and Jim Marshall Warc Best Practice November 2011

How to set an effective media budget


Hamish Pringle and Jim Marshall The foundation of any successful advertising and marketing communications campaign has to be the budget on which it is based. This is because the brand's strength of presence within the media flow as perceived by customers is in competition with all its direct (and indirect) market competitors. This begs the crucial question of how that budget should be set. Over the past few decades there have been many books, publications and articles which have put forward various ways in which a media budget can be established. One of the notable things about this period in marketing history is the sheer diversity of methodologies proposed, and the lack of rigour of many of them. This can't have done marketers any favours when making their case to their finance directors, chief executives or other senior colleagues. Nor has it been helpful to agencies who have struggled to rationalize their spending recommendations. For example, Roderick White, in his Admap article of December 1999, noted a total of no fewer than 15 ways in which the budget can be set: 1. Intuitive/rule of thumb: 'enough to do the job', based on experience 2. Maintaining previous spend, sometimes infl ation adjusted: advertising as fixed cost 3. Percentage of previous sales: backward-looking, compounds failure (or rewards success) 4. 'Affordable': what's left after cost and profit requirements are met 5. Residue of last year's profits: focuses on source of funds, not their use 6. Percentage of gross margin: begs questions of cost-efficiency 7. Percentage of forecast sales: most common method 8. Fixed cost per unit of sales: like percentage of turnover 9. Cost per customer/capita: mostly business to business 10. Match competitors: assumes they are right 11. Match share of voice to brand share: like the above 12. Marginal return: direct response approach 13. Task approach: define objectives, and cost out how to reach them. Best in theory, but may require modelling 14. Modelling: the most sophisticated approach, and not easy 15. Media weight tests: looks empirical, but usually difficult to evaluate or replicate.

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However, ever since the pioneering work of Simon Broadbent in 1989, John Philip Jones in 1990 and Stephan Buck in 2001, there has been a growing confidence in using the relationship between SOV and SOM as the most important determinant of the budget level required. This relationship has also been explored in detail by the IPA through the torture test of three UK recessions with original analyses by Malik PIMS, and latterly Millward Brown and Data2Decisions. These have shown conclusively that the companies that increase their relative share of voice perform better during recessions and recover more quickly afterwards. Indeed there's a growing realization that economic recessions provide ambitious brand owners with a much better opportunity to build market share than bull markets do. More recently, there has been a flurry of analytical activity and subsequent publications which have elucidated the relationship between SOV and SOM and made it absolutely central to the process of setting a brand's media budget. First of all there was the seminal Marketing in the Era of Accountability by Les Binet of DDB Matrix and Peter Field, marketing consultant, published in 2007 as the second in the IPA Datamine series of monographs. In their key third chapter, on 'Budget setting', they put forward the concept of 'equilibrium SOV', as shown in the figure below. Figure 1: The concept of equilibrium SOV

Source: Marketing in the Era of Accountability (IPA report, 2007) Binet and Field then went on to provide compelling evidence to show that the relationship between SOV and SOM varies according to the nature of the brand and of the market it's operating in, and thus provides the fundamental parameters for setting the brand's media budget. This was followed up two years later with the publication in July 2009 of the IPA report by Peter Field called How Share of Voice Wins Market Share. This presented the findings from a major piece of work by Nielsen Analytic Consulting on fast-moving consumer goods (FMCG) brands, which proved that the key relationship between SOV and SOM not only obtains for the elite IPA Effectiveness Awards campaigns, but also for 'average' brands with 'average' campaigns. Moreover, the comparative analyses of the IPA Effectiveness Awards and Nielsen databases provide benchmarks not only for media budgets, but also for the extra impact that high-quality strategy, media planning and creative content can deliver. The report's key finding was that the critical metric that determines the level of a brand's value market share growth is its extra share of voice (ESOV), defined as SOV minus SOM. Furthermore, the relationship between ESOV and growth still holds for typical brands in the digital era. The report also set out some key guidelines for setting budgets and targets: 1. Share of voice over and above market share delivers growth. For an 'average' campaign for an 'average' FMCG brand,
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expect value market share growth of 0.5% per year for each 10 points of extra share of voice (ESOV). 2. Significant differences do exist across categories and brands. Therefore, it is important that a brand measures its specific relationship between SOV and SOM to provide a more accurate benchmark. 3. There are certain factors which drive the level of market share growth year-on-year. Accelerated growth can be expected by bigger brands. Based on a 10 percentage point differential between SOV and SOM, on average, FMCG brand leaders can expect 1.4 points of growth. Challenger FMCG brands can expect a more modest growth of 0.4 points per year. Brands in younger categories also drive greater market share gains. 4. Brands benefit from investing in quality (ie more effective) campaigns: IPA Effectiveness Awards-grade campaigns respond at a significantly higher level (60% more effective) than typical ones. Brands benefiting from 'new news' derived from launching or re-launching also respond at a higher level (15-25%). For smaller brands ESOV alone may not be enough they will also need to invest in quality. 5. During economic downturns, short-term investment cuts damage the brand in the long term. Brands that choose to invest in effective campaigns and at correct SOV levels during this downturn will emerge in a stronger market share position. Figure 2: Key findings from the IPA Databank and Nielsen

Source: How Share of Voice Wins Market Share, a report of key Nielsen and IPA Databank findings from an IPA seminar, IPA, 2009 FromPeterField'sfurtheranalysesoftheIPAEffectivenessAwardscasesforhisbookBrandImmortality,wenowalsoknow that as market categories age the return on extra SOV flattens progressively as they move from new, to growth, maturity and decline. Brands in new categories generate seven per cent more value share growth (in proportional terms) per point of extra share of voice (SOV-SOM) than in the average category. Successful brands in growth markets achieved around one percentage point of market share growth for every seven percentage points that their share of voice exceeded their share of market, whereas in mature categories the ratio is 1:8. In declining markets it falls to 1:12. From these findings it can be seen that setting the brand's budget is not simply a question of sticking a finger in the air and saying, 'Let's do what we did last year plus a bit for inflation', or asking, 'What's the average advertising to sales ratio?' and matching that. On the contrary, it's a sophisticated analytical process which requires accurate information on the brand's competitive set, its status within it, and the history of advertising and media expenditure in its category. For example, is there a challenger brand which uses innovative media and creative strategies to punch well above its weight?

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And what's the previous behaviour of competitor brands during periods of economic recession do they exhibit the Pavlovian reaction of so many and cut their budgets? Or does the brand leader seize the opportunity to pile on the pressure on the weaker players? In a downturn there's the knee-jerk reaction by the majority of competitors either to reduce their media budgets or to stop investing altogether, so a brand's share of voice can be increased automatically just by maintaining its expenditure or not reducing it as much as its rivals. Secondly, because there is less demand, the price of all media falls, and thus buying share of voice becomes much cheaper. During the recent recession, TV airtime in the UK was trading at 1980s prices and thus presented an absolute bargain for ambitious brands. The companies that pursue this extra SOV strategy tend not to talk about it for obvious reasons they know it's giving them massive competitive advantage but there is anecdotal evidence that the owners of big powerful brands in FMCG markets, such as Procter & Gamble and Reckitt Benckiser, have taken the opportunity to capitalize. We also know that the returns on extra SOV are even greater in markets where the distribution chain is less dominated by a handful of multiple retailers, and thus recessions present brands in durables and services markets with even more potential upside if they hold their nerve! And of course it's not just a question of the sheer weight of media money; it's all about the content of the brand's message, and whether or not it is based on a compelling consumer insight resulting in an engaging communication, delivered accurately to its target market. The latest analysis has proven, for the first time, the concrete link between creativity and effectiveness. In 2010, research conducted by Peter Field and commissioned by Thinkbox and the IPA proved, for the first time, the concrete link between creativity and effectiveness. Field analysed the correlation between a campaign's performance across the creative awards as recognized by The Gunn Report, and its business performance in the IPA Effectiveness Awards (200008). The research showed a direct correlation between strong advertising creativity and business success, with creatively awarded campaigns being, on average, 11 times more efficient indeed, the more awarded the creative work, the more effective it was. An update to this report, extending the time period analysed (19962010), was published in June 2011. Not only did this larger sample confirm a strong correlation between creativity and effectiveness, but Field was also able to look at the time trend to creativity, and discovered that creatively-awarded campaigns are becoming more effective over time. The analysis also revealed that many of these highly awarded campaigns were starved of budget, thus reducing their brand's SOV. In relying largely on creative stand-out, the advertiser was missing a major trick, as increasing the competitive pressure with extra SOV would have achieved far bigger gains in market share. Since these outstanding campaigns are a rarity, if a client has got one it really is a golden opportunity to build their business. Brand managers and agencies alike need to be aware of these key factors and develop their budget proposals and campaign plans in full recognition of the strength of their authority. Finance directors, marketing directors and agency directors now have the market-based metrics and benchmarks they need to budget and plan advertising and marketing communications expenditure professionally. They also have a proper basis on which to assess agency performance. No agency or marketing client can guarantee to continue to deliver the same level of business performance for a brand if ESOV is falling as a result of under-investment in media and marketing communications. Brand strategy and creative content that are exceptional in effectiveness terms can mitigate the effects of declining ESOV for a time, but sooner or later 'gravity' will assert itself and the brand will suffer. Clearly, it would now be ludicrous to expect a campaign to increase a challenger brand's market share in an
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FMCG category without acknowledging the budget level required to do so. Or, if the brand lacks the necessary financial firepower, it must be determined to have the degree of strategic insight, channel management skill and creative inspiration to compensate. So ESOV is a key metric for any payment by results (PBR) model which has a business results component the setting of objectives without a counterbalancing measure of scale of investment (eg ESOV) is not a sound basis for the contract between agency and client. In future we would expect that any sensible and fair agency incentive agreements would be agreed in the context of these parameters. Indeed, it would be prudent if brand marketers' and marketing procurement professionals' own bonus schemes were framed in the same way, especially as this would reinforce the importance of the underlying brand metrics to their boards. Using the model of the media flow makes eminent sense of the importance of SOV in relationship to SOM and its variations according to brand size, market category, market life stage and the nature of the message. Hundreds of thousands of brands are swimming in the media flow which customers are dipping in and out of for nearly half their waking hours. So the competition is incredibly intense. Bigger brands have an inherent advantage, as Ehrenberg first showed with his 'double jeopardy' analyses, largely because they are relatively dominant in the distribution system. FMCG markets are incredibly tough because they are dominated by very powerful distribution and retail chains whereas brands operating in less constricted sectors such as services have much more freedom to manoeuvre in the flow. New brands in new markets, and brands with 'new news' to impart, have an advantage, because human beings are like magpies with silver objects when it comes to novelty. Brands that produce truly outstanding creative content and achieve true fame not only stand out in the flow, they generate valuable word-of-mouth and third-party recommendation. Brands that spend enough money and marshal all their media resources to provide more prominent and multiple touch points for their customers do better than those who underinvest.

This is an extract from Spending Advertising Money in the Digital Age: How to Navigate the Media Flow, published by Kogan Page.

About the Authors Hamish Pringle is a Director and Council Member of the Advertising Standards Authority (ASA), and is Strategic Advisor to integrated creative agency 23red. He was appointed Director General of the IPA in 2001, stepping down from this position in 2011. Jim Marshall is Chief Client Services Officer for Aegis. He has worked in media for over 35 years, as a director at Young & Rubicam, Reeves Robertshaw and later at DMB&B. He is also a member of the IPA Council and former Chairman of the IPA Media Futures Group.

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