Developing a post-COVID budgeting methodology

COVID-19 is not just a health crisis. The necessity of containment has caused great disruption, fundamentally changing the way that our societies and economies ordinarily function and thrive.

As lockdown restrictions begin to lift, brands face the challenge of navigating a new business, social and cultural landscape; this is primarily characterised by a recessionary environment, as well as altered consumer expectations and behaviours.

Accordingly, strategists should begin by considering how the crisis has impacted a brand’s business objectives and select an appropriate budget setting methodology. To apply it precisely, the impact of the crisis on the advertising market and a brand’s category must be examined. Finally, it is necessary to consider how the new context impacts the required balance between brand and activation to maximise effectiveness. Throughout the course of this essay, a luxury fashion brand will be used illustrate recommendations.

Understanding the brand's business objectives

When setting budgets, it is imperative to understand a brand’s business objectives, and in this case how they have been impacted by the pandemic. In the case of the example luxury brand, the closure of stores and production sites due to COVID-19 led to an immediate drop in sales. With business now resuming, the brand developed a recovery and growth strategy, focused on their recent launch into the luxury makeup category. Accordingly, their business objective is set as an increase in share of market (SOM) in this category. The behavioural objective will be increased penetration into a younger affluent audience by way of the intermediary objectives of increasing share of voice (SOV) and increased spontaneous awareness in the target.

Selecting an appropriate budget-setting methodology

With clear objectives it is possible to select an appropriate budget-setting methodology. These methodologies include, but are not limited to, econometric modelling, advertising to sales or margin ratio, area testing and inflation multiplier (Broadbent, 1989). While each have their merits and limitations, a SOV versus SOM analysis is most appropriate in this case, as it links directly to the business objective and is less resource intensive than econometric modelling. It has been empirically observed that a brand has an equilibrium SOV in their category at which SOM will be stable, and that if their SOV exceeds this equilibrium their SOM will rise too (Binet and Field, 2007). A brand’s “excess share of voice” (ESOV), the difference between a brand’s SOV and SOM, is decisive for budget setting. For an average campaign, SOV needs to be 10 points above market share to impact 1% market share growth (Binet and Field, 2007). Additional factors should be considered for this calculation, such as category and brand size (Clarke et al. 2009). As the luxury brand are entering a new category, for example, it should be taken into account that their ESOV is likely to impact higher than average market share growth, as “new products get much faster growth for a given advertising budget” (Binet and Field, 2018: 50).

Considering the economic context

To proceed with this methodology the economic context, and its impacts on the relevant category and advertising market, must be considered. Studies of ad spend during previous downturns prove that a recessionary environment can significantly boost long-term growth of brands that continue to invest, and significantly damage the recovery of those that do not (Tellis and Tellis, 2009; McGraw-Hill, 1986). Brands often cut ad spend to shore up profitably in the short-term during recessions, which has some decisive consequences. Firstly, SOV reduces for those brands, meaning brands in the same category automatically attain ESOV by simply maintaining spend. Secondly, due to decreased demand, the cost of advertising typically falls. Consequently, brands who continue to invest can attain ESOV at a cost that would be impossible during “normal” times. This is true of the current post COVID-19 context. WARC projects a 16.7% (equal to £4.2bn) decrease in the UK ad market this year, reflected across all categories to varying degrees (McDonald and Clapp, 2020). Strategists must therefore consider, and continually monitor as closely as possible, SOV shifts in their category, as well as the rate of deflation in the advertising market. This will give a more precise indication of how much investment will result in the ESOV necessary to deliver a certain % increase in SOM.

Finding the appropriate balance between brand and activation media

To ensure recovery and growth beyond the recession, brands must also strike the appropriate balance between brand and activation media. Since the pandemic, many businesses have focused on short-term activation tactics, driven by the economic downturn, reduction in brand building media such as OOH and cinema, as well as a rise in e-commerce. As restrictions ease, channel selection will continue to be impacted by persisting changes to consumer behaviour and media consumption, however the principles of brand and activation must be upheld, as continued over-investment in activation media will harm long-term growth for any brand (Binet and Field, 2013). In “Effectiveness in Context” (2018) Binet and Field identify a 62:38 split in favour of brand as an “all-context sweet-spot” to drive effectiveness and demonstrate how this should be tweaked due to a brand’s context. Applied to the luxury brand’s new launch into makeup for example, offsets should be made due to high innovation by nature of entering a new category, and a premium price point. As these benefit from higher activation effects, these factors necessitate a skew towards brand, resulting in a budget balance recommendation closer to 75:25 in favour of brand.

In conclusion, strategists should apply contextual considerations to evidence-based methodologies to give an accurate and effective budget recommendation at this time. The current context of uncertainty and downturn is one in which many brands are understandably reticent (or in some cases, unable) to invest, especially in brand building activity.

This crisis has created significant challenges for brands, but it also presents an inherent opportunity. By demonstrating what has been proven out in the past, strategists will have the best chance of convincing brands to seize it.

Olivia Dotzek is a Strategy Manager at Havas Media Group. This essay earned her a Distinction for the  IPA Advanced Certificate in Communications Planning. There is a 10% discount available on the course fee for bookings made by 31 December 2020 using discount code IPAEARLYBIRD.