To Spend or not to spend_A new approach to A&P

Opportunities for Action

CONSUMER MARKETS

To Spend or Not to Spend: their investments on the basis of strategic priori-
A New Approach to Advertising ties. One typical European consumer-goods
and Promotions manufacturer, for example, had a similar level of
A&P investment (as a percentage of turnover) for
Trying to outshout the competition in an environ- each of the brands and countries in its portfolio,
ment that is increasingly cluttered and costly can regardless of the brand’s competitive position
lead to frustration and low returns. With expens- and the market’s potential for growth. (See
es for advertising and promotions (A&P) adding Exhibit 1.) As a result, the investments weren’t
up to more than 20 percent of sales for many con- focused on the most optimal areas.
sumer companies—and with pressure from retail-
ers to spend even more on promotions—managers The investments of this manufacturer in brands
are looking either to reduce these costs or to reap and countries with a weak market position
more value from them. (boxes 1 and 2) were relatively small and below
the minimum investment level, when measured
For A&P to be effective, companies must spend on in absolute euros. This spending, therefore, had
the right brands in the right regions and convey little impact. Investments in brands and coun-
compelling messages through the right channels. tries with a highly competitive and growing mar-
Given the confusion created by proliferating chan- ket (box 3) were also limited, so the potential in
nels, many marketers are trying to understand these markets went unexploited. Investments in
which channels and promotion models are most brands and countries with a low-growth but
efficient. That is a tremendously important but highly competitive market (box 4) were insuffi-
complex question that will take time to answer. cient to break the stalemate, yet were too high
for a harvest strategy. Investments in brands and
Yet even as marketers search for the answer, they countries with a leading market position (boxes
can increase returns immediately and dramatical-
ly by allocating A&P expenses in a fundamentally Exhibit 1. Many Companies Fail to Optimize A&P
new way. Our approach is founded on zero-based Investments Across Their Brand Portfolios
budgeting and an aggressive differentiation of
investment levels by brand, market segment, One manufacturer’s distribution of A&P investments in
region or country, and—ultimately—retailer. brands and countries as a percentage of turnover
Companies that have applied this approach rigor-
ously have freed up as much as 20 percent of High 1 3 5 25
their A&P investment. That, in turn, has allowed 17
them to focus spending where it will have a much 22
greater impact.
Market 2 4 6
The Current State of Spending growth 19 22 17

Few companies with a portfolio of brands direct- Low Contested Strong
ed at a variety of market segments in different Weak
regions or countries adequately differentiate
Competitive position

SOURCE: BCG analysis.

1

Opportunities for Action

CONSUMER MARKETS
TO SPEND OR NOT TO SPEND: A NEW APPROACH TO ADVERTISING AND PROMOTIONS

5 and 6) were far in excess of the level required • A&P Spending Intensity. This can differ consid-
for maintenance and also had little impact, since erably from one category to another. In our
it was no longer possible to increase market experience, the average A&P investment of all
share significantly without a breakthrough the players in a particular category (in a sin-
innovation. gle region or country) can range from as little
as 5 percent to as much as 45 percent,
Of course, most marketers don’t start out with depending on the category. (See Exhibit 2.)
the intention of investing at the same level in
every market. The fact that so many companies • Company Market Share. The advertising invest-
end up doing so is a result of the way support ment required to maintain market share (the
budgets are developed. In most companies, maintenance level) is directly related to scale
managers from various areas get together annu- and competitive position. When relative mar-
ally to negotiate new budgets by translating ket share doubles, for example, the advertis-
brand strategies into incremental adjustments to ing investment (as a percentage of sales)
the previous year’s budget. Rarely do they enter- required to maintain that share can be
tain the possibility of allocating no funds, or reduced by 30 percent. (See Exhibit 3.) Note,
considerably more funds, than were designated however, that the investment needed for pro-
the previous year. With a zero-based budget, motions to maintain market share is usually
however, that is exactly what they would have to not related to scale or competitive position.
consider. (See Exhibit 4.)

The traditional process suffers from three short- Exhibit 2. Market Support for All Players
comings. First, it gives only limited considera- in a Category Varies Greatly
tion to the significant differences in A&P intensi- from One Category to Another
ty and sensitivity that often exist among market
segments and regions or countries. Second, it Support 50 Average spending by all players in a category
fails to recognize the fundamental choices to be as a percentage of market value for different
made among growth, maintenance, and harvest
strategies for each brand, segment, and region or categories in a single region or country
country. Third, market share and the impact of
support investments on profits are not measured, spending
and, as a result, share targets are not linked to
A&P budgets. as a
percentage 40
The Dynamics of Zero-Based Budgeting
of gross
To better allocate A&P investments, it is essential
to begin with a zero-based budget. Our consumer 30
approach, which we have used successfully in
our client work, is founded on the following sales1
practical observations about the core drivers of
appropriate A&P support: 20

10

0
1 2 3 4 5 6 7 8 9 10 11
Category

Promotions
Advertising

SOURCE: BCG analysis.
1Support spending comprises advertising, promotional expenses, and
discounts; gross consumer sales is the total volume times the nonpromo-
tional price.

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Opportunities for Action

CONSUMER MARKETS
TO SPEND OR NOT TO SPEND: A NEW APPROACH TO ADVERTISING AND PROMOTIONS

Exhibit 3. Required Advertising Investments Exhibit 4. The Investment Required for Promotions
Correlate Strongly with Relative Share to Maintain Market Share Is Usually Not Related
to Scale or Competitive Position
Advertising 100
as a percent- Promotional 200
age of sales costs as a
percentage
80 of sales

60 150

40 100

20 50

0 0
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Relative share1 Relative share1

One brand within a category in a single country One brand-and-category combination

SOURCE: BCG analysis. SOURCE: BCG analysis.
1Relative share is a player’s share divided by the share of its largest 1Relative share is a player’s share divided by the share of its largest
competitor. competitor.

• Threshold Investment Levels. Investments in Finding the Optimal Approach
advertising below a minimum level are usually
ineffective, so it is better not to make them With these insights in mind, we have developed
at all. a methodology for identifying the optimal
A&P investment level for each brand in each
• Category Responsiveness to A&P. The effect of market segment and reg ion or country. It
investments in excess of the maintenance level involves three steps.
on market share differs from one market seg-
ment to the next. The amount of investment Measuring the effectiveness of past support
required to win 1 percent of market share in a spending. Assessing investments in light of the
single year, for instance, can vary from two to first four drivers of A&P spending described
four times the maintenance level. Furthermore, above will reveal the underperformers, whose
these investments will be effective only if a problems then need to be diagnosed and fixed.
breakthrough innovation exists and all the Underperformance can stem from problems with
other elements of the marketing mix support the quality of the support spending (the wrong
market-share growth. (See Exhibit 5.) advertising message or media mix, ineffective
scheduling, or ineffective promotions) or prob-
• The Future Value of the Category. The value of lems with the marketing mix (lack of innovation,
any growth in market share can vary greatly wrong pricing, or a declining share of distribu-
among brands, market segments, and regions tion). In one case, we found that a client’s past
or countries, depending on market growth and investment levels for a leading brand in one
profitability. country were far in excess of what was needed

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Opportunities for Action

CONSUMER MARKETS
TO SPEND OR NOT TO SPEND: A NEW APPROACH TO ADVERTISING AND PROMOTIONS

to maintain share. The company had introduced Estimating the net present value (NPV) of a
no significant innovations, and, not surprisingly, growth, maintenance, and harvest strategy for
its investment failed to yield any growth in mar- each brand and segment, taking into account
ket share. When management realized this, it expectations of future category growth and
decided to cut back spending and pursue a main- value. These calculations enable management to
tenance strategy until a meaningful innovation choose among the three strategies for each brand,
became available. segment, and region or country. (See Exhibit 6.)

Exhibit 5. The Cost of Increasing Market Share Exhibit 6. Find the Optimal Level of Support
Can Vary Greatly Across Categories for Each Brand, Segment, and Region or Country

Change in 5 Category X Support-sensitive category
market 4
share, 3 50 100 150 200 250 300 High 8
2001–2003 2 Actual spending on brand as a percentage of
(%) 6
maintenance-level spending1
1 Market 4 Grow1
growth 2 Maintain
0 (%)

–1 Harvest

–2

–3 0

–4 Low
–2
–5 0 0.5 1 1.5 2 2.5
0 Contested
Weak position Strong
position position
Relative market share

Change in 5 Category Y High 8 Less support-sensitive category
market 4 6 Grow1
share, 3 50 100 150 200 250 300
2001–2003 2 Actual spending on brand as a percentage of
(%)
maintenance-level spending1
1

0 Market
growth
–1 (%) 4

–2 2
Harvest
–3 Maintain
0
–4

–5 Low
0 –2
0
0.5 1 1.5 2 2.5
SOURCE: BCG analysis. Contested
Weak position Strong
NOTE: Each square represents a brand. The diagonal lines represent the position position
average correlation between support spending and the change in market Relative market share
share for all brands in the category. In Category X, support spending
must increase 2.6 times to produce a 1 percent growth in share. In Cate- SOURCE: BCG analysis.
gory Y, spending must increase 4 times to produce 1 percent growth. 1A growth strategy makes sense only if the other elements of the marketing
1Maintenance-level spending is the average spending on all brands in a mix support it. If they do not, a maintenance strategy is most appropriate.
category, adjusted for the relative market share (or scale) of a brand.

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Opportunities for Action

CONSUMER MARKETS
TO SPEND OR NOT TO SPEND: A NEW APPROACH TO ADVERTISING AND PROMOTIONS

Of course, this choice cannot be made on the If a brand has a weak position in a high-growth
basis of NPV calculations alone. Other factors— market or a contested position in a low-growth
such as the promise of the innovation pipeline, market, the company would be well advised
the “brand voltage,” and the role of a market seg- either to invest in order to gain market share or
ment within an umbrella brand—must also be to harvest. And if the intensity of A&P is high
taken into account. Nevertheless, estimating NPV in the relevant market segment, a harvest strat-
for each generic strategy adds science to the art of egy would be preferable to investing. Of
finding the right investment level and highlights course, companies should also consider the
fundamental choices that might otherwise be innovation pipeline. If a breakthrough innova-
overlooked. tion can be launched, an investment strategy
may be justified even if the starting position
Determining the spending levels required to is weak. And finally, a harvest strategy is best if
reach market-share targets for each strategy a brand occupies a weak position in a low-
and the level of competitive intensity for growth market.
each brand, segment, and region or country.
We have found that one of the chief benefits of If we were to apply our methodology to the
our methodology is that it provides clients with company in Exhibit 1, it would reveal that a
hard numbers to substantiate the need to reallo- major reallocation of spending was in order.
cate investments. If, for example, a company (See Exhibit 7.) Note, however, that this exam-
has a strong competitive position in a market ple depicts average spending in each quadrant.
of limited or no growth, it may be more
inclined to adopt a maintenance strategy—espe- Exhibit 7. By Reallocating Spending, a
cially if the model indicates that sensitivity to Manufacturer Can Optimize Its A&P Investment
A&P investment is low. Choosing such an
option could reduce A&P investments by as Recommended shift in A&P investment
much as half. as a percentage of turnover for one manufacturer

In the case of a contested—or strong—competi- High 1 3 40 5
tive position in a high-growth market, the com-
pany might consider an investment strategy if 22 25 23
the appropriate conditions exist. First, there 19
would have to be a pipeline of solid innova- 17
tions, along with other elements of the market-
ing mix to support growth. Second, consumers Market
in the market segment would need to be suffi- growth
ciently sensitive to advertising and promotions
in order for the added investments to result in 246
increased market share. If those conditions
don’t exist, a maintenance strategy would be 19 22 17
the most logical approach. 10 17 14

Low

Weak Contested Strong

Competitive position

Current
Improved

SOURCE: BCG analysis.

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Opportunities for Action

CONSUMER MARKETS
TO SPEND OR NOT TO SPEND: A NEW APPROACH TO ADVERTISING AND PROMOTIONS

The differences would be even greater at the When combined with a comprehensive support-
level of individual brands. In the case of specif- spending platform, our approach can be an
ic brands in boxes 2 and 6, all further invest- important enabler in bringing these changes
ment might be stopped, whereas the level of about. Mobilizing the organization to use the
investment for a number of brands in box 3 methodology, however, will require a new atti-
might exceed 40 percent. Overall, application tude toward maintenance and harvesting strate-
of the methodology could result in a 20 percent gies. In many companies, managing a mainte-
reduction in A&P investments (or a decrease nance or harvest brand is viewed as less than
from 20 percent to 16 percent of turnover). At beneficial to a manager’s career. That is why
the same time, the investments in high-growth most brands and regions or countries are identi-
market segments, or in regions or countries fied as growth possibilities, even when the NPV
where the company holds a contested position, of a maintenance or harvest strategy would be
would have greater impact. much higher.

Thinking Differently About Maintenance Before an organization decides to differentiate its
and Harvesting investment levels, it must be willing to have
some of its best people manage its maintenance
Our methodology can be a good tool for support- and harvest brands, and it must assess them on
ing a more aggressive differentiation of invest- that criterion specifically. The fact is that defend-
ment levels in a portfolio of brands aimed at a ing a market-share lead with limited resources or
variety of market segments in different regions or maximizing profit in a shrinking market with
countries—if the organization is prepared to imple- hardly any resources often requires more effort
ment it. To be sure, implementation will require and talent than growing market share in an
most packaged-goods companies to make some expanding market with nearly unlimited
fundamental changes, such as: resources.

• Establishing a fact-based assessment of the ***
effectiveness of total support spending in terms
of market share and profit impact Most consumer companies could radically
improve the effectiveness of their spending on
• Moving from incremental budgeting to fact- A&P by differentiating investment levels by
based and greenfield discussions on allocating brand, market segment, and region or country
support spending (with the explicit involve- more aggressively than they typically do. If you
ment of financial and general managers) suspect that this may be true for your company,
here are some key questions to address:
• Resolving the frequent discrepancies between
advertising (managed by the marketing depart- • How large are the differences in our company’s
ment) and promotions (managed by the sales A&P investments, as a percentage of sales, for
department) so that these functions can cooper- each brand, market segment, and region or
ate on integrated advertising and promotional country?
plans for each brand, category, and region or
country

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Opportunities for Action

CONSUMER MARKETS
TO SPEND OR NOT TO SPEND: A NEW APPROACH TO ADVERTISING AND PROMOTIONS

• Is there a clearly defined strategic rationale for to reap significant additional value from
these differences (or for the lack of differ- the efficiency and effectiveness of their A&P
ences)? Are the differences in the intensity and investments.
sensitivity of advertising and promotions
among the various market segments and coun- Emile Gostelie
tries adequately acknowledged? Are the differ- Rich Hutchinson
ences in our competitive position (relative Mark Kistulinec
market share) properly translated into a main- Wouter-Jan Schouten
tenance level for the brand? Have we made a
clear choice among maintenance, harvest, and Emile Gostelie is a senior vice president and director in
growth approaches for each brand, segment, the Amsterdam office of The Boston Consulting Group.
and region or country? Does this choice reflect Rich Hutchinson and Mark Kistulinec are vice presidents
the level of A&P investments? and directors in the firm’s Atlanta office. Wouter-Jan
Schouten is a manager in BCG’s Amsterdam office.
• How does our company decide on its total
A&P budget for each brand, segment, and You may contact the authors by e-mail at:
region or country? Is the decision based on [email protected]
sound logic or does the process of negotiation [email protected]
result in incremental adjustments to the previ- [email protected]
ous year’s budget? [email protected]

Considering questions such as these has To receive future publications in electronic form about this topic or
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practices, and that has opened up opportunities
© The Boston Consulting Group, Inc. 2005. All rights reserved. 4/05

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