Commentary

Budget Allocation Modeling

One of the principle reasons I decided to enter the world of Hispanic advertising was to bring a more rigorous and data-driven analytical approach to what I viewed as the unsophisticated and heuristic nature of some of the most important decisions made in our industry. While our industry has come a long way, including the omnipresence of account planning and the growing and rich field of Hispanic direct response, there is still one very important process that has not managed to move forward -- the allocation of Hispanic marketing budgets.

As anyone who has ever worked at an agency or media / publisher will tell you, overall marketing budgets typically come down from the "heavens" (i.e., the C suite) with little input from outside marketing professionals. However, how those overall marketing budgets are allocated across markets, products / services and marketing mix elements is typically a joint exercise between the client and its agencies, with some occasional input from select third parties such as consultants, media and publisher partners.

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Yet, more often than not, the decision as to how much to invest in Hispanic advertising is made heuristically or worse yet, simply handed down as the "scraps" of what is left after general market and other lead agencies lay their claims. As the Association of Hispanic Advertising Agencies (AHAA) Right Spend report has been chronicling for years, advertisers have failed to allocate the minimum recommendation of 8% (based on Hispanic population and buying power alone) of their advertising budgets to the Hispanic market. While each industry and company will ultimately invest varying allocations based on their particular situation, the aggregate 8% AHAA benchmark indicates that, on average, companies are under-investing in the Hispanic market.

So how much of an advertiser's marketing budget should be allocated to the Hispanic market? The more relevant question is how should companies, together with their agency partners, approach the question of budget allocation? A decision as important as how much to invest in the fastest-growing minority group should be based on more than "rules of thumb" or an after-thought exercise of pooling leftover resources. I suggest that budget allocation models should be used and that marketers gradually employ more sophisticated approaches based on increasing availability of data.

As I've alluded to so far, most companies use simple heuristics, or rules of thumb, such as allocating marketing budgets based on some arbitrary percentage or a bottoms-up decision rules approach (i.e., determining desired awareness or reach / frequency levels and then backwards calculating required marketing spend).

Instead, I recommend using the two-part marketing allocation approach described by Harvard Business School's Gupta and Steenburgh "Allocating Marketing Resources" (2008) paper. This approach initially models demand and then uses those estimates as input into an optimization model to determine appropriate allocations across the marketing mix. Without getting too academic, Gupta & Steenburgh suggest modeling the demand that will be created or how much additional Hispanic consumer sales will be generated by an increase in Hispanic marketing resources (i.e., demand elasticity).

There are three ways to model this Hispanic demand:

1. Statistical Models: When historical figures for Hispanic market sales and marketing expenditures are available, the impact of Hispanic marketing activity on sales can be modeled using a demand function. This is the best option, available to companies with recent experience marketing to Hispanics.

2. Experiments: When there is a lack of reliable recent data on Hispanic market sales / marketing activity, companies can undertake experiments to gauge Hispanic consumer response to new marketing activities. This incremental approach allows companies to use small test initiatives to model out expected results from larger-scale initiatives.

3. Expert Judgment: When past data is not available and experiments are not feasible, companies should use the managerial judgment and experience of their Hispanic agencies to forecast Hispanic sales.

While the data-based approaches of options 1 and 2 provide the most accurate models of Hispanic demand, use of any of the three approaches will provide companies with an excellent starting point to model Hispanic demand and therefore determine proper Hispanic marketing budgets. As opposed to taking a passive approach to Hispanic marketing, these models provide companies the basis for a proactive approach based on the bottom-line return on investment.

The next step is to optimize a Hispanic marketing budget among the growing marketing mix of elements ranging from promotions, to direct response, to branding and across vehicles such as TV, digital, radio and out-of-home (a topic for another day!).

2 comments about "Budget Allocation Modeling ".
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  1. Lisa Urias from Urias Communications, February 4, 2010 at 1:48 p.m.

    At Urias Communications, we have long advocated that Hispanic market advertising should employ the same, strategic and methodical approach as general market advertising. When this approach is implemented and appropriate budgets are allocated in the Hispanic market, clients see tremendous growth and success. Today, Hispanics continue to be the most significant American growth story. It is essential for businesses to focus on this market as a priority to increase their bottom lines.

  2. Neil Brown from brownchild ltd inc, February 5, 2010 at 1:15 p.m.

    We have been testing Spanish language media for over 20 years and we have yet to see it work successfully. We have a retail client whose customer base is more than 40% Hispanic. We have run Spanish language media exclusively and in combination with 'general' programing. The only measurable effect is when Spanish language is used exclusively; total sales actually drop. But when it is used in combination there is no increase in either total sales or in sales to people willing to identify themselves as Hispanic. In our opinion the reason is: Spanish speaking people do not watch or listen to Spanish language media exclusively so they are reached in 'general' media.
    Therefore, in markets where Spanish language stations are priced at a CPM or CPP premium it makes no sense to use the medium.
    However there is an unquestioned PR value to having an advertsing presence in Spanish language programming. The question is: if it will NOT increase sales how much is the PR worth?
    don.brown@brownchild.com

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