One of the major expenses which retailers usually cut in a downturn is advertising. However you cannot stop advertising altogether as the public will soon forget about you. The secret is to spend your advertising dollar to the best advantage.

Firstly let us look how retailers usually plan their advertising spend:

 
A.  BUDGETING FOR ADVERTISING

There are about five major budgeting techniques used by retailers and buying associations today in determining their advertising and promotional budgets:

1.  All - you - can - afford -procedure

The weakest of the budgeting methods.

 All other retailing costs are accounted for and what is over is placed in your advertising budget.

 Little importance is placed on advertising as a retail mix variable

 Expenditure is not linked to objectives.

 It is a form of no funds no advertising

 It is a method used predominantly by small conservative retailers

2. Arbitrary or Historical Method

This method relies on previous budgets. A percentage is added or subtracted from this years budget to determine next year's budget.

A reference point is thus used as a measurement

The budget is adjusted based on your feelings about past success and  future trends

It is an easy method to calculateThe disadvantage is that size of budget is rarely tied to specific objectives and evaluation is also difficult
This is a technique useful for small operators

3.  The Competitive Parity Method

The Advertising budget is raised or lowered according to the actions of competitors. If a leading retailer in an area raises their advertising by 8%, competitors in the area will follow suit.

The advantage is it provides a point of comparison and is market-orientated

The disadvantage in that you are following and not leading 
Also it can be difficult to obtain data and so assumptions of similarities in businesses, years in business size, location, pricing policy, buying group member etc) must be made

It is often used by small and large retailers

4.  Percentage -on - sales Technique

The retailer bases the advertising budget on sales revenue.

In past years the retailer established an advertising to sales ratio say 3 % of sales

In future years, the ratio remains constant and the amount to be spent on advertising varies according to the planned sales for the year.

The benefits are the use of sales as a base for comparison.

The shortcomings are that there is no relation to objectives. For an established  retailer, an increase in sales may not require an increase in advertising. The advertising dollar spent tends to decrease during poor sales periods, when in fact an advertising boost could be beneficial to sales.

The technique usually results in too much advertising in periods of high sales and too little advertising in periods of low sales.

5. The objective and task method

 
Under this method the retailer clearly defines his advertising objectives and then determines the size of the budget necessary to satisfy these objectives.

The number of goals that can be achieved in a year is only limited by the cash resources of the business.

The advantage is that goals are clearly stated e.g. the cost to establish greater awareness of our store name are worked out in advance.

Expenditure on advertising is related to the completion of goal orientated tasks. Therefore the method is adaptable and success or failure can be evaluated.

The major shortcoming, is the complexity in setting goals, especially for small retailers.

 
In determining which technique or combinations of techniques you decide to use you must weigh up the strengths and weaknesses in relation to your individual requirements and constraints.  The percentage on sales technique seems to be the most popular method with retailers in Australia.

PLANNING FOR ADVERTISING

Planning an advertising budget means that you need to think carefully about what results you expect from your advertising.

Are you looking for an increase in total sales?

Are you interested in more sales of a particular product?

Are you trying to defend yourself against a competitor?

How much money is available for advertising?

If you don’t advertise will people still remember that you exist?

Remember all the best advertising techniques and objectives in the world are of little value if your store is untidy, your staff are not properly trained to deal with customers and the ambiance of your store does not reflect what you are trying to convey in your advertising message or catalogue. Let us get our house in order before we invite visitors to buy our goods.

Example:

How to calculate your sales budget

 
Assume your sales budget for next month is $50000 and you basically have 5 product groupings in your store 

First we look at how much we want to allocate to the budget to achieve our objectives. Assume we are adopting the percentage on sales method and have allocated 5 % of forecasted sales i.e. $2500.

Next we allocate the advertising budget to each product line according to its percentage of forecasted sales that have been adjusted to reflect the specific objectives for the month.

 
Your objectives for the Month:

1.  Products in groups 1 and 5 require normal advertising.

2.  Products in group 2 attracts co operative advertising from the manufacturer.

3.  You are trying to expand sales of products in group 3.

4.  You need to clear excessive stocks of products in group 4.

Allocation of the advertising dollars for the month per product group is thus as follows:

                                                                                                Product line

Product line                                                                              advertising

objectives             % of sales            % of advertising              $

---------------          ---------------            ----------------------        --------------

1 - normal                 10                                10                          250     

2 -  plus Co-op          40                                20                         500

3 -  expand                20                               30                          750

4  - overstocked       10                                20                          500 

5  - normal                20                                20                          500

                                 -----                             -----                      -------

                                100                               100                       2500

Many retailers also keep a monthly advertising calendar to complete the advertising budget. The calendar should have enough space to record the advertising media planned for each day, the major theme, notes on featured products and most important the cost.

They also keep information such as sales from the previous year, the number of transactions on a particular day and the theme of last year’s advertisements to help them decide on how to spend their adverting dollar.

Having determined the days of the month that will produce the best results, the best advertising medium for your objectives and the products you want to promote, you will have created a powerful advertising strategy which will maximise the effectiveness of your advertising budget.

MARKETING GROUP ADVERTISING METHODOLOGY

Example:

A pharmacy buying group, that services the advertising requirements of a diverse number of pharmacists and geographic locations in Australia.  Experience has shown that catalogues form the key of their adverting campaign.

These catalogues are produced 7 or 8 times a year at specific selling times.

The products to be included in each catalogue are selected by a special committee of  members.
Where possible they try to include in their catalogues " Shut out" products which from experience in the past give members the best gross margins.
These catalogues cost about 7 cents each to produce and members are permitted to purchase as many as they require to service their area.

As a rule of thumb sales from catalogues should account for about 30 % of sales.

EVALUATING THE PERFORMANCE OF A CATALOGUE

In order to asses whether you are receiving value for your advertising dollar, from a catalogue, you must always prepare a profit and loss statement for each catalogue to determine its viability as follows:

Example: Advertising for a single product retailer

Sales of product advertised in two weeks prior to catalogue             500

Sales of product advertised in 2 weeks while catalogue in Customer homes                                                                                              1250

Increase in sales directly attributable to catalogue                            750

Selling price per product                                                                  $100

Gross profit per product normal - 50%                                              $50

Gross profit allowed for in catalogue - 30 %                                      $30

Profit and loss from Christmas Catalogue

Extra profit generated from catalogue         750 x $30           =    $22500

Less Cost of catalogue

        Production   100000  x  cents                       $7000                                         

        Distribution costs                                           $10000

                                                                               ---------      =  $17000

                                                                                                     ----------

Extra gross profit generated                                                           $5500

The catalogue was cost effective yielding extra gross profit of $5500

Remember that in addition to the measured value of the catalogue, there is also the intangible value of reinforcing your name, and your location in the minds of the customers.

HYMIE ZAWATZKY

www.thetemplargroup.com.au