Budget Allocation Modeling for the Hispanic Market
February 5th, 2010
Posted by Jose Villa
(a condensed version of this blog was run on MediaPostâ€™s EngageHispanic on 2/4/10)
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 managed to move forward, year after year, according to the same simplistic approach: 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 â€œheavensâ€ (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, their agencies, with some occasional input from select third parties such as consultants, media and publisher partners.
Yet, more often than not, the decision as to how much to invest in Hispanic advertising is made heuristically or worst yet, simply handed down as the â€œscrapsâ€ of what is left after general market and other lead agencies lay their claims. As the AHAA (Association of Hispanic Advertising Agencies) 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 to the Hispanic
market based on their particularly situation, the aggregate 8% AHAA benchmark indicates that on average companies are under-investing in the Hispanic market.
So how much of an advertiserâ€™s marketing budget should be allocated to the Hispanic market? The more relevant question is how should companies, together with their agencies 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 â€œrules of thumbâ€ or an after-thought exercise of pooling left-over resources. I suggest that budget allocation models should be used, and that marketers gradually use more sophisticated approaches based on increasing availability of data.
As Iâ€™ve alluded to so far, most companies use simple heuristics, or rules of thumb, such as allocating marketing budgets based on some arbitrary percentage (e.g. 5% of total marketing resources) or a bottoms-up decision rules approach (e.g. 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 Schoolâ€™s Gupta and Steenburgh â€œAllocating Marketing Resourcesâ€ (2008) paper that initially models demand and then uses those estimates as an 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. Option 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. Option 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. Option 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 & 2 provide the most accurate models of Hispanic demand, use of any of the 3 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 to the Hispanic market based on the bottom-line return on investment they will reap from their marketing investments. 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!)
You must be logged in to post a comment.