Unsatisfied Result of Advertising – Cut Back the Increased Budget
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BackgroundUnsatisfied result of advertising – cut back the increased budgetMarket share dropped back toward 5.4%Improve market position:Increase consumer awareness and develop more favorable attitudesStrategy of increasing advertising weightRevitalize advertising program:All the advertising budget should go to spot tv20% increase in the quarterly advertising budgetThe new campaign was to start in the autumn of 1993, the 2nd quarter of 1994 fiscal year (July 1, 1993 to June 30, 1994) – October, 1993Advertising on average of $2 million per quarterEnough to maintain 5.4% market shareAnticipation: competitors’ expenditures would change much during the new few yearsVan believed increasing advertising by 20% (to $2.4 million) would increase market share to 6%Messages in memo:Wholesale price of coffee: $17.20 per 12-pound caseAverage retail ad and promotional allowance: $1.60 per caseVariable costs of production and distribution: $11.10 per caseAverage gross contribution to fixed costs and profit: $4.50 per case
Increase in gross contribution: $4.50* 22 million * 6% = $0.60 millionAdvertising payout rate: change in gross contribution – change in ad expenseChange in ad expense: $0.10 million / $0.20 million = 0.5We can expect to make $0.50 in net contribution for each extra dollar spent on adA quarter later, the market share only increased to 5.6% (Jan 1994)A 0.2 point increase in share generated only $200,000 in extra gross contribution per quarter, which must be compared to the $400,000 we have expended in extra ad.The ad payout rate is thus only 0.50 – much less than the breakeven pointOct-Dec: 5.6%Jan-Mar: slightly over 5.6%Apr-Jun: 5.5%Planning for fiscal year 1995 (from July, 1994)Reduce ad expenditures below its tentatively budgeted “normal” level of $2.0 millionQuality of ad copy and the appeals:rated only about 0.95 on a scale that average ad at 1.0Currently, rated about 1.0 on the same scaleNew ads expected to rate at least 1.15ADBUDG calibration and managerial estimatesIf ad budget were reduced to 0, perhaps half of the market share would lose in the next year, or 1/8 lost in next quarter