194 CHAPTER 6 BUDGETSlong run this might lead to eroding competitive edges and market and brand positions. Crisis
situations such as troubles with production or distribution might need exceptional investments
in public relations and crisis communications. Other internal occurrences such as fi nancial
scandals, strikes, ecological catastrophes, etc., might also demand budget adjustments.
Unexpected opportunities or threats in the market might change strategic plans and com-
munications budgets, as well as unexpected moves by competitors, new legislation, new
media and changes in media costs.
Economic recessions will oft en have serious consequences for communications budgets.
Consumers spend less money, and shrinking markets mean stronger competitive battles
in which price is a commonly used weapon. Companies may react in one of two ways
with regard to their promotional spending. Some try to economise in every way possible.
A substantial amount of all costs are fi xed and cannot be lowered in the short term. Most
companies are attracted by a budget that is quite easy to bring down: the communications
budget. Other companies react by increasing their budget, believing that extra investment
will drive sales up. A crisis is regarded as the ideal moment to establish their position. Th is
is called anti-cycle budgeting. Market share is gained during recessions and then defended in
periods of a booming economy. Some multinationals such as PepsiCo, Coca-Cola, General
Mills, Kellogg’s and Procter & Gamble have a strong belief in long-term investments in
marketing communications.
Some companies prepare contingency budgets. Th ese are reserve budgets provided for
fi nancing quick management actions as necessary. Th ese crisis actions are planned in so-
called contingency plans. Th ey stipulate which actions must be taken when, for instance,
signifi cant drops in sales occur or an important competitor switches to aggressive promo-
tional actions or launches a new product. Reaction time will be substantially lower in such
cases when all appropriate actions and budgeting have been foreseen.Budgeting for new brands or products
Although budgeting for existing brands in established product categories is the most com-
mon task for marketers, oft en they are confronted with the problem of budgeting for a brand
or product launch. Th is is even more diffi cult than the former. Historical data on the budget
settings that have been successful are not available and consequently easy-to-use schemes as
discussed above are not appropriate for estimating required budgets.^23
Th e primary budgeting method for launching new brands or products should be the
objective-and-task method. But given the uncertainty and lack of historical data, this is not
only a diffi cult budgeting method but also one that is not risk-free. Th erefore, other methods
are good back-ups to compare estimations made earlier. A marketer may, for instance, exam-
ine the industry advertising-to-sales (A/S) ratio (advertising intensity) for the market in
which a brand is to be launched. Th e marketer may decide to set a budget that is higher than
the industry average in order to make an impact. Doubling the A/S ratio is considered a safe
guideline for the fi rst year of introduction. In the second year, overspending the ratio by 50%
should do. Of course, it could be even more informative to make comparisons with particular
competing brands or products.
Peckham, a consultant with AC Nielsen, developed a rule of thumb for new, fast-moving,
consumer good brands.^24 Peckham’s 1.5 rule recommends setting the SOV of the brand to be
launched at 1.5 times the desired SOM at the end of the brand’s fi rst two years. A limitation
of Peckham’s rule is that it is only applicable in markets or product categories for which there
is a strong correlation between SOV and SOM. A study of 638 fi rms across 20 industries^25
found a strong relationship between SOV and SOM across a broad range of industries for
consumer as well as industrial products.
It is quite easy to calculate SOV once the industry communications budgets are known,
but to estimate target market shares, the brand’s order of entry on a market should beM06_PELS3221_05_SE_C06.indd 194M06_PELS3221_05_SE_C06.indd 194 6/5/13 3:01 PM6/5/13 3:01 PM