Irena JAKIMOVA-APELGREN

Managing Director, McCann Erickson SKOPJE 

Introduction

Advertising activities, as part of the marketing strategy of every company, are very important for the successful building of the brand equity and corporate identity on long-term basis. They bring and build awareness for the product/service, create interest among consumers and non-consumers, create desire for the advertised product and, ultimately, call them to desired action(s).

In order to be effective and to achieve certain results, these activities must be tailored to meet certain objectives. Advertising objectives are derived from and serve to the marketing objectives. Most of the time, the advertising objectives are either to:

build awareness (brand- or product-) or

build sales.

Advertising activities are performed in order to meet advertising objectives and they require substantial efforts for planning, selection and, above all, budgeting. All activities, all vehicles and all media have to be paid for and thus, a certain budget for these activities must be decided upon and allocated. Setting of the advertising budget is one of the most difficult and important decisions a manager has to make. It is extremely important for the planning of the advertising activities and determines their scope. In real life, there is no company with unlimited money to spend on advertising, so the advertising objectives and activities must be set with the budget limitations in mind. It is also not necessary and wise to over advertise. So, how much to spend on advertising is a very challenging decision.

The size of the advertising and promotions budgets may vary from billions of dollars to just a few thousand per year. However, these budgets have to be set somehow and by someone in the organization. After all, the effects from the advertising and promotional activities will depend on the invested funds, besides other components (knowledge of the consumers, sound strategy, attractive creativity and right messages).

Not all the managers understand and treat advertising as an investment, as it should be treated. Advertising is investing in people’s minds, attitudes and habits, investing in the strength of a certain brand or product, investing in long-term cooperation and above all, in loyal and trusting relationship. David Ogilvy wrote somewhere that factories sell products and advertising sells perceptions. Advertising sells images, dreams, solutions to problems, satisfaction of needs, identification with certain lifestyles, it sells hope, it sells satisfaction… But, many managers in many companies all over the world consider advertising as expenditure, as a luxury which a company can afford only in good economic times, only when the sales are good, so they can spare a portion of past or future sales and be present in the media. This attitude is wrong. It considers advertising to be a variable from the sales and, in reality, it should be vice versa. Sales are, in major part, a dependable variable from advertising, i.e. communication efforts. It should also not be considered blindly that sales depend only from advertising, because there are many other variables, like direct marketing, effects of the sales people, pricing, product quality and appropriateness, distribution and other.

The Literature

The literature has come to distinguish few methods of setting advertising budgets that have been used by companies for more than half a century. They are theoretical and methods developed through practice and experience of the companies. They are grouped and treated differently by different authors throughout years, either in the classical textbook or in different academic studies and articles. Some of them are grouped as judgment-oriented (depending mostly on personal views and comprehensions of the advertising budgeting) and some of then are grouped as data-oriented. The literature mostly prefers the data-oriented methods, since they are more close to the precise determination of budgets and closest to the economic models of the marginal theory. These data oriented methods (like Objective and task, Quantitative models) are usually also connected to more sophisticated processes of the budget decision-making. They are usually used by companies where the Bottom-up/Top-down approach is used, where all levels of the managerial pyramid are almost equally represented in the process. The literature shows that there is a trend towards rising sophistication in the methods and processes that companies use for setting of advertising and promotion budgets. In summary, there has been a considerable evolution during the period of the past 75 years towards more sophisticated methods. As Lynch and Hooley (1990) point out, the majority of authors consider the Objective-and-task method to be the best possible approach to the ideal model based on the marginal analysis proposed by Economic Theory. Studies on this subject should be done on regular basis and in every country, whether European or else. The trends should be monitored and the situation in developing markets should be analyzed under the light of the current knowledge and historical experience.

The literature basically recognizes the following methods for setting advertising and promotion budgets (Prendergast et at., 2003):

Arbitrary:  solely determined on the basis of what is ‘felt’ to be necessary

Affordable: the company determines what it can spend on areas such as production and/or operations and then decides how much is can afford for advertising & promotions

Competitive Absolute: the budget is set in line with the closest competitor

Competitive Relative: all the competitors in the market tend to spend in line with their market share

Objective & Task: in accordance with what is required to meet the advertising & promotion objective(s)

Percentage of Last Year’s Sales

Percentage of Anticipated Sales Next Year

Quantitative Models: computer simulation models are used involving statistical techniques such as multiple regression analysis

Return on Investment (ROI): Advertising & Promotions is considered an investment and monies are spent to the point where the ROI is diminishing

Unit Sales: the company allocates a fixed % of unit price for advertising & promotions and then multiplies this amount by projected sales volume
(e.g. 5% unit price x 200,000 units sold)

In reality, it is very often most probably the case that companies use a combination of models.

The question of advertising budgeting has become more and more important and complex due to rising media costs and the enormous number and variety of media options available. Internet, direct marketing, alternative media… they all play an influential role in the change of the approaches to reach advertising goals with certain advertising budgets. Since the marketing-oriented societies require substantial investments in sound advertising industry, this issue is very important for a small and underdeveloped economy like the Macedonian one is.

Setting of advertising and promotion budgets in Macedonia

 This article discusses and analyzes the advertising budgeting methods and processes used by a sample of 48 companies in Republic of Macedonia. The sample may not be representative, but is consisted of companies representing different industries (both consumer and non-consumer), products and services, different sizes, types of ownership and spending levels. The sample is not small, having in mind the size of the country (population of 2 million) as well as the total number of advertisers and the estimated size of the advertising market (22 milllion Euros).

This study, especially its parts concerning the specific research, sheds light over the main questions of how advertising and promotion budgets are set in the Republic of Macedonia, compared to the existing knowledge and experience, whether compiled in the literature or gathered through academic studies and presented in academic articles. It has been assumed that the case of the Macedonian companies and their practices can not be different from the rest of the world. Especially not from the European or the US companies, whose influence can be noticed through practical business and economy cases as well as theoretical influence from the education. It turned out that majority of the Macedonian companies are “quick learners” who can adopt practices and know-how from foreign experiences.

As a part of the marketing strategy, the advertising strategy requires substantial efforts for planning, selection and budgeting of the activities. All activities, all elements and all media must be paid for and thus, a budget for the communication activities must be decided upon and allocated. One of the most critical decisions that the marketing manager has to come to is how much to spend on the promotional budget. This means that, while the setting of the objectives represents a very important part of the marketing plan, the budgeting, or the frame of the budget, is nothing less important. In the real life, there is no company with unlimited funds to spend on advertising and promotion, so objectives must be set with the budget limitations in mind. The size of the advertising and promotions budget can vary from billion dollars per year (like Procter and Gamble, The Coca-Cola Company, Unilever, General Motors and other) to few thousand dollars or Euros. However, the importance of the budget decision is the same for all of them. The accomplishing of their objectives in given time can crucially depend on the money they spend on advertising activities. The new product (or service) can fail or be a huge financial success, the sales targets can be reached or not, the company image can be at stake.

It is important to note that, because the advertising and promotion industries in Macedonia are still in development and even more, the marketing as a segment of every company has still not taken its real place, both budgets and activities were considered together. Many times, in the real practice, they interfere with each other and are viewed as one segment, as parts of one budget and of one plan. Very often, direct marketing activities are also grouped under “advertising and promotion.”

Setting advertising objectives and determining the advertising budget are directly related and influence each other, because the objectives provide grounds for what the company wants to do and to achieve, while the budget limits what the company actually can do (Schultz, 1990). The issue of establishing the advertising and promotion budget is not only connected to the company itself, but has a significant larger impact on the broader economic picture. Many companies and individuals derive their incomes from other companies’ promotional activities and they all represent entities in the whole circle of production of one country’s gross domestic product. Media, advertising agencies, direct marketing and research agencies, event management firms, individual creative and artistic professionals, printing houses, production studios, companies that produce promotional materials and products… The list is long and their sales and profits depend on the total advertising and promotion budget in the country. The salaries they make, the taxes they pay - they all contribute to the total economic situation by taking a significant part in the financial transactions and flows and by generating disposable income in the hands of all the people employed and somehow connected to the advertising and promotion industry.

On the other hand, advertising and promotion are meant to cause bigger sales, these bigger sales mean bigger taxes and more money in the financial flows of the country. Some of the advertised products are of domestic origin and production, some of them are services realized in the country, and their bigger sales contribute to the complete picture of the country’s domestic production and wealth. Those that are either imported and distributed for sales or produced under foreign licenses, they still generate income for the state and thus contribute for economic development. That is why advertising as an industry is important for the economy of one country.

In a young and underdeveloped economy in recession as the Macedonian one is, there is a strong need for development and increase of the marketing (advertising) activities and the knowledge and practice around them. They are generators of economic growth, they induce market development, market diversification and education of the consumers. The advertising activities provide the consumers with information and they give them the freedom of choice by communicating to them a number of opportunities and choices for solving their problems and satisfying their needs. Advertising helps the producers (distributors) to market their products better, thus stimulating the development of the market competition. 

Unfortunately, in Macedonia, there are no official and detailed data about advertisers, about their spending levels (either in media or in different segments of marketing communication) and, definitely, no information on how the advertising budgets are set, what factors influence them, how they are linked to advertising and marketing objectives, to effectiveness and results. There are no official and published data about size of the advertising market, neither about advertisers, agencies or media. The only available information is the media monitoring reports and rankings that companies and advertising agencies can buy from specialized research and monitoring agencies.  These data are mostly based on rate card figures and do not represent the real picture, because discounts and rebates are not known. So, we don’t actually know how much is being spent on which media nor how much is spent by each advertiser annually or per individual campaign.

Half of the companies that participated in the survey were small companies (50%) and the second place (27.1%) belongs to the medium sized companies. Companies were grouped according to number of employees, a system prescribed by the Chamber of Commerce.

Most of the companies in the sample were private (70.8%). A significant portion goes to the multinational companies (their branches, subsidiaries or representative offices), which could turn out to be a significant factor for further analysis. However, this seems to be a good and reasonable structure because:

majority of privately owned companies in the sample gave more credibility to the results, meaning that they should depict the local situation more precisely;

a good representation of the multinational companies (more than one quarter) depicts their presence and their inevitable influence on the domestic market.

It is good to notice that 70.8% of the companies treated advertising activities as an investment. In some of the companies that either regard advertising solely as expenditure or as both, it appeared that this is more a case of how they are obliged to present it in the financial reports and books. But, there still is the fact that in some of the companies, advertising is regarded as an expenditure or luxury.

Table 1. Structure of the sample by levels of advertising spending

Since there are no available data about the size of the market, advertising spending levels and budgets, advertising agencies use internal research and calculations. According to them, it is believed that the total advertising market is worth around 22 million Euro (for 2004). Television and other media are much cheaper than in the neighboring (Bulgaria, Serbia & Montenegro, Greece) or in similar countries by size (Slovenia). That is why the amount of 500.000 Euro for annual advertising budget is considered to mark a company as “big advertiser”. It is believed that the biggest annual budgets of just few major advertisers in some better years (2002) have been in the range of 2-3 million Euros. It also worth to mention the comparison cases of my personal experience where, for example, an annual budget of an international client for Macedonia has been three times smaller than the agency commission for the same client in a larger market, like France or Germany, for example. One can imagine the big discrepancies in budgets when we speak of large, developed markets and Macedonia, as a small market, still in development.

From the survey results, we could notice the following interesting distributions:

most of the small spenders (50%) are small companies

most of the medium spenders (57.9%) are also small companies

most of the big spenders (53.8%) are also small companies

all of the very big spenders are large companies (total of 5 companies)

This distribution is mainly due to the fact that there are actually mostly small companies (50% or 24 in total) in the sample and that is the reason why they are most dominantly represented in all spending levels. However, the most interesting fact is that small companies are big spenders.

Regarding the processes used, we noticed that most of the companies (50%) use the “Bottom-up/ Top-down” approach. This fact is very positive because this means that the marketing departments or managers do have a saying in the budget preparation. They propose budgets to the top management, who then changes or approves the proposed figures and returns the decision to the marketing department for implementation. All levels of the managerial pyramid are included in the process of decision making, i.e. budgeting. The reverse method (“Top-down/ Bottom-up”) is second in representation and this implies that there is a major portion (27.1%) of the companies that have to budget advertising and promotion activities according to the beliefs and instructions of the top management. None of the companies from the survey used the method “Bottom-up”. Those who responded “None of the above” stated processes such as:

“The proposal is either given by the marketing or the general manager and then the decision is brought together”;

“Initiated by me, approved by the Director for my region” (Sales Development Manager, the only employee of a Representative Office for a multinational company);

“Initiated by the marketing department and modified according to the needs and the final decision is brought by the General Manager and the Management Board”.  

Another respondent (General Manager of a small company) explains:

“Our company is small and all the decisions regarding the marketing budget are Top-down, with some consultations with the employees and, of course, much analysis of the market and consumers”

The following results were obtained on the question of methods used.

Table 19. Distribution of methods for setting advertising & promotion budgets

According to respondents’ claims, the most often used method is “Objective & Task” (50% of the companies in the sample claimed using this method), followed by “Percentage of Anticipated Sales Next Year” (33.3% of the companies). The “Arbitrary” method comes on the third place (22.9% o the companies).

Private companies claimed they mostly use the method “Objective & Task” (55.9%). Multinationals mostly use “Percentage of Anticipated Sales Next Year” (46.2%), while the only present public company uses “Arbitrary” and “Affordable” methods.

Large companies use the method “Objective & Task” in most cases (90.9%). Medium companies use “Arbitrary” and “Objective & Task” (38.5%), while small companies mostly use “Objective & Task” and “Percentage of Anticipated Sales Next Year” (37.5%). Most of the small companies are private or multinationals.

Logically, small spenders are either small or still not developed companies and they claimed to mostly use the “Arbitrary” and “Affordable” methods (50.0%). Medium spenders use a more sophisticated method “Objective & Task” (47.4%) and big spenders are either bigger companies, have longer tradition or belong to a multinational company. They use more sophisticated methods like “Objective & Task” (53.8%) and “Percentage of Anticipated Sales Next Year” (38.5%) in combination. Also, very big spenders, showed more sophistication and all of them (5) claimed they used the “Objective & Task” method. Two of them use it in combination with the “Percentage of Anticipated Sales Next Year”.

Companies that use the Bottom-up/Top-down process for budget determination mostly use the “Objective & Task” method (54.2%). This could mean that the marketing department (or managers) use sophisticated methods and plan budgets according to certain advertising (brand or sales) objectives. The second most used method is “Percentage of Anticipated Sales Next Year” (41.7%), which could imply to the opinion that the marketing department follows a certain pattern for budget determination, for which they get approvals from the top management.  Very logically, the opposite cases show that when the CEO or the owner sets and imposes the budget (Top-down), it’s mostly according to the “Arbitrary” method (66.7%). In the case of Top-down/Bottom-up method, we can see that again that use a more sophisticated method, the “Objective & Task” (53.8%). 

Most of the cases that have reported using none of the mentioned processes, use the “Arbitrary” method. This implies to a certain group of companies or their managers who work far from the sophisticated methods and approaches. CEOs or owners impose the budget according to the “Arbitrary” method and in that process, they obtain some information of pro-forma approval from their subordinates.

The most often answer for the reasons why they use the mentioned method was that it was “Company policy”. This means that someone has already determined this method and implemented or imposed its use within the company. Second most often answer was that they used that method because it has turned out to be the best method so far. This is quite similar to the previous one, because it implies to previous trend or tradition of usage. Also, this answer implies that the methods and/or the results have eventually been tested and checked. Interesting portion takes the answer “The foreign partners do it that way”. Here, we can see the influence that multinational or companies from other (presumably more developed) markets had on the development on the marketing skills among Macedonian managers and decision-makers in the companies.

According to the responses, we noticed that the main factors influencing the advertising budgeting are the economic situation (52.1%) and the competition (39.6%). Unfortunately, the economic situation in the past few years has not been very favorable. For the small companies, beside the economic situation, the experience of the person in charge plays a big role (34.8%), the same as the moves of the competition. Factors like “business plan goals” or “marketing strategy” are only significant for the large companies, who tend to work according to more sophisticated managerial principles.

Majority of the companies (48.9%) determine their budgets at the end of the year for the next one, which implies to existence of some strategic planning.  Some of them set budgets at the beginning of the year, but it’s worth noticing that almost a quarter of the companies set budgets “when the need arises.”

Apparently, more three quarters of the sample (77.1%) work with an advertising agency. This is a positive fact because it means certain modern and planned approaches towards advertising as an activity. One might also assume that this could be a result from the sample being partially compiled through referrals from advertising agencies. The average length of cooperation with the existing advertising agency is 39 months (something over 3 years) which is good having in mind the fact that the advertising business (agencies) started to develop in 1994, some 11 years ago. Most of the companies that work with advertising agencies are small. Maybe they have realized on time that outsourcing is the future of company development and rely on professionals to take care of their market communication. Also, this might be due to the fact that most of the multinationals are small companies (representative offices) and they take a larger sample of this segment. Multinationals almost always work with advertising agencies (either on a local contract or on regional or worldwide). It is one of the pillars of their successful international growth.

Luckily and strangely, almost half of the companies claimed that they consult the advertising agency when they prepare the advertising budget. Based on my personal experience and on the discussions with colleagues on top positions in other advertising agencies, during the preparation of this project, I believe this is mainly valid for the cases of:

individual campaigns;

launch of new products.

In practice, companies do not often consult advertising agencies when they prepare annual budgets. They do consult them about marketing strategy and its implementation within the business plan, but very seldom about the budgets or the methods.

Second position is the media (15.2%), followed by internal (13 %) and CEO (10.9%). Again, from my practice and discussions on this issue with other colleagues, but also with managers of influential and big media (TV, print or radio) – I noticed one practice that needs attention. Some media tend to give advices and consulting to smaller local companies (mostly producers) or importers about the size of their budget and its allocation. Mostly they refer to their own medium, but also give them more general advices.

Regarding size, all companies mostly claim they consult the advertising agency, while smaller companies also tend to listen to media and internal resources. Private companies mostly consult their advertising agencies as well as their internal resources (and intuition). Multinationals mostly consult the advertising agencies, but the media, as well. Big impact on this replies have the annual contracts that multinationals tend to achieve with leading media (mostly TV).

Conclusions

Surprisingly for a small economy, still in development and with an advertising industry of one decade, the findings proved that Macedonian companies mostly use sophisticated methods and processes. The majority of the sample claimed to use the Objective and Task method, prescribed and defended by the majority of the relevant literature as being closest to the most real approach and having most connection to advertising objectives, while having less subjectivity and dependence of sales. The companies also turned out to use the Bottom-up/Top-down in most cases, followed by the Top-down/Bottom-up approach. As for the methods, lots of companies also used the Percentage of Anticipated Sales Next Year. This proves existence of certain strategic planning, but, unfortunately, makes the advertising dependable of limited, anticipated factors, instead of desired objectives.

It must be pointed out that the companies in Macedonia have been under the influence of their foreign partners, either mother companies in the cases of the multinationals, or just partners from whom they buy or import products. Over one quarter (27.2%) of the sample is consisted of multinationals, whose internationally accepted approaches, processes and methods play a significant part in the structure of the whole picture of the advertising budgeting in Macedonia.

Also, one must notice that there is another group among the responses, which shows certain lack of sophistication in those companies. It is not a big part (22.9%), but yet significant by its structure (small, private companies, small spenders) and implies to residual habits, processes and treatment of the advertising.  They mostly use the Top-down approach and imply to the image of old fashioned companies where the top manager(s) or owner(s) still have the authoritative domination in all decision-making process.

It is good that the figures that showed that advertising is considered as an investment in 70.8% of the companies. This, together with the fact that 77.15% consult the advertising agencies in their budgeting process, implies that there is a high level of awareness of the importance of the advertising activities among the companies in the sample. There is one question lingering and that is: Are the advertising agencies well educated and well aware which budgeting methods are most appropriate? And what budgets would be ideal?

It is not optimistic, however, that half of them claimed the economic situation to be the most important factor in their decision about the advertising budget. But, isn’t that the case in many other more developed economies?

References:

Lynch, J. E. and Hooley, G. J. (1990) Increased Sophistication In Advertising Budget Setting. Journal of Advertising Research, 30 (1), p. 67-75.

Prendergast, G., Shi, YZ. and West, D. (2003) Advertising Budgeting Methods and Processes in China. Hong Kong Baptist University, Working Paper No. 200309.

Schultz, D. E. (1990) Strategic Advertising Campaigns. Third Edition. NTC Business Books