Advertising cost management. Financial efficiency

Cost management for the production and distribution of advertising products and services

In manufacturing organizations, this is part of the cost of products, works and services.

In trade organizations - a component of distribution costs

These costs are reimbursed from income from the sale of advertised goods and services.

Is it important to set the exact amount of advertising costs???

Information disseminated during the election campaign, referendum, recall of a deputy

Mainly operating costs

In some cases, they are essentially investment

Determining the list of indicators necessary for effective cost management

Actual Cost Analysis

Study of factors influencing costs

Cost planning

Accounting, control and regulation of costs

Basic indicators:

The decision to set the absolute amount of advertising costs for the planning period is strategic

The indicator is determined when drawing up corporate strategic and current plans for advertising promotional games and other events

Approved by the top management of the organization

Cost indicators in statistical reporting 4-phase costs “Report on the costs of production of products (works, services)”

There are the following main indicators of the level of advertising costs:

The practical significance of various classification groups of costs for managing advertising costs:

By economic elements

According to costing items

By type of production

By department

Material costs

Labor costs

Contributions for social needs

Depreciation of fixed assets and intangible assets used in business activities

Costs of participation in exhibitions, fairs, exhibitions and sales

Cost of product samples. Transferred in accordance with contracts. Agreements and other documents directly to buyers or intermediary organizations for advertising purposes and non-refundable

Costs attributable to the cost of products, works, services

Costs reimbursable from enterprise profits

Volume of production and sales of products and services of the advertiser

Number of markets and their scale

Degree of market differentiation, number of segments, specific groups of buyers and consumers

The level of competition in the markets in which advertisers operate

Development level of joint promotion

Marketing policy and applied strategies

Crisis phenomena in the economy

* Is it lower in medium and small organizations than in large ones? (economy of scale appears)

For personal consumption by the population compared to industrial goods

The highest

Initial data for establishing the planned amount of advertising costs:

Results of the analysis of actual indicators of absolute costs, their level and structure

Results of a study of advertising cost factors and their advertising intensity

Planned indicators of sales volumes of products and services

Planned indicators for the volume of advertising (number of advertising events, their quantitative characteristics, the power of advertising campaigns, planned indicators of target audience coverage and frequency of contacts, their estimated cost, etc.)

There are many methods

Applicability of methods varies significantly

The choice of method depends on:

Level of planned work

Experience in using existing tools

Availability of initial data

Fixed % method

Ir = Uir *B100

B - the planned amount of revenue from the sale of products and services, in monetary terms

Financial capability method

Residual method:

Used. When an organization's management underestimates the importance of advertising

Cause and effect is ignored

What calculations can be made??? (actual level of advertising costs, level, number of consumers, etc.)

Competitive parity method

Costing method

Dorfman method

A type of expert method

The main method for assessing the financial (economic) effectiveness of advertising is based on determining the additional profit received from advertising and comparing these volumes with advertising costs.

Advertising is one of many, not always the most important, tools for increasing sales. For this reason alone, it is difficult to assess its role in increasing trade turnover. In addition, advertising goals may be set that are only indirectly related to turnover or not related at all. It should be taken into account that in addition to commercial advertising, it also has a social effect.

The simplest method for determining the financial (economic) effectiveness of advertisements is based on an analysis of the results of an experiment, the essence of which, in most cases, boils down to the following. Two or more comparable local markets are selected in which the company operates for a certain period of time with varying degrees of advertising support (all other things being equal). The difference in trading results correlates with the difference in the volume of allocations for advertising, on the basis of which a conclusion is drawn about the magnitude of the contribution of advertising to the change in the company’s turnover.

In most cases, a company, for various reasons, cannot afford such a “simple” method, but the company always has at its disposal expert analytical methods for determining the economic effectiveness of advertising promotions or campaigns. The main problem is isolating the “net effect of advertising”, i.e. determination of that share of the increase in sales volume (profit) that was provided exclusively by advertising in the period for which advertising costs are taken into account.

The reasons for changes in turnover (profit) are divided into Main and Other: the main reason is the company’s advertising campaign of the current period; other factors of change in turnover (profit) are:

· inertia of consumer behavior when choosing a product, because some buyers make repeat purchases regardless of the additional amount of advertising exposure and other marketing tools;

· seasonal fluctuations - the average value of long-term changes in sales during the period;

· changes in some vital needs and attitudes of consumers - expert assessment based on an analysis of changes in the aggregate demand of the region;

· political (military-political) situation in the sales regions - expert assessment based on an analysis of changes in the aggregate demand of the region;

· the level of inflation expectations of consumers - the predicted or expected growth rate of the price of the advertised product during the period when it will retain its consumer properties;

· environmental disasters and natural disasters - expert assessment;

· other factors in terms of assessing their impact on the total effective demand of the region.

The contribution of factors to sales growth can be determined on the basis of expert estimates; for this it is necessary to analyze the dynamics of sales volumes in each specific case and have a sufficient understanding of the general economic situation in the region.

The further scheme of actions is apparently quite simple - in order to assess the contribution of advertising events to changes in income (profit), changes caused by other factors are subtracted from the overall change in the financial results of the period.

To analyze financial efficiency, it is possible to use models that describe changes in turnover depending on the amount of advertising expenses (“Widal-Wolf”, “Kuhn”, etc.) The models assume that the dependence of turnover on allocations for advertising activities can be expressed in the form function, and if this function is defined and known, it is possible to calculate the amount of allocations for advertising that will ensure maximum profit. It is generally accepted that the graph of this function is an S-shaped curve. A model of this type was first described by M. Vidal and H. Wolf. In the Vidal-Wolf model, the volume of goods sold during a period of time is a function of the following factors: advertising costs; sales reactions to advertising; the level of market saturation with advertised goods; norms for the decline in sales volume in the absence of advertising.

For comparative analysis, it may be useful to calculate the effectiveness of advertising expenditures (cost-efficiency index - CEI) in comparison with other competing companies: where Vi and Vj are the sales volume of firms i and j, respectively, for a certain period of time, and Ei and Ej are the volume of advertising costs of these firms for the same period.

The calculation example is quite simple.

Firms “1” and “2” are competitors producing goods of the same group.

Firm-1: sales volume for the year is 5 million USD, advertising costs are 200 thousand USD.

Firm-2: sales volume for the year is 2 million USD, advertising costs are 50 thousand USD.

The efficiency indicator of advertising expenditures of Firm-1 (CEI_1) relative to Firm-2 is calculated as the ratio of 25 to 40 = 0.625, and the efficiency indicator of advertising expenditures of Firm-2 (CEI_2) relative to Firm-1 will be equal to the inverse ratio of 40 to 25 = 1.6. Consequently, according to the Index, 50 thousand USD of Firm-1 seems to work more efficiently than an amount four times larger for Firm-2.

Work on analyzing the financial efficiency of advertising costs, as a rule, is carried out by structural divisions of advertisers, because With this approach, the possibility of leakage of “commercial information” is eliminated; in addition, elements of nervousness associated with the public assessment of the work of some employees (usually close to management) are not introduced into the internal life of the company’s team. But in this case, the situation resembles an audit of the accountant’s activities, carried out by the accountant himself, with the provision of a report to the accounting department, and a copy to management.

Let us illustrate the impact of changes in the size of the advertising budget on sales volume, provided that the company operates in a competitive market and the initial advertising volumes are not zero (equal to or slightly less than the market average):

The graph illustrates the dependence of changes - an increase in the annual volume of advertising by 4 times led to an increase in sales volumes by 2.5 times.

If the initial advertising volume was 2000 USD per month, and the sales volume was 50 thousand USD/month, then the economic feasibility of intensifying advertising efforts is obvious. An additional 70-75 thousand USD/year invested in advertising allowed the company to increase sales volume by 900 thousand USD/year.

Implementation of almost all advertising management functions tightly

associated with the problem of financing, development and execution of the advertising budget. The developed budget allows you to more effectively allocate resources in the process of practical implementation of plans, and clearly identify the main executors. It also helps to ensure control not only over the expenditure of funds on advertising, but also over the effectiveness of advertising activities in general. The entire range of solutions for developing an advertising budget can be divided into two large blocks:

• 1. Determination of the total amount of funds allocated for advertising.
• 2. Distribution of advertising budget funds by item of expenditure.

Among the existing approaches to determining the volume of the advertising budget of Magnat-S LLC, it is better to use the method based on cost planning, since Magnat-S LLC has no advertising practice, nothing to compare with, nothing to rely on.

An advertising cost plan is an estimate of the costs of various planned promotional activities aimed at achieving set goals. This method is directly related to the second large block of problems in developing an advertising budget - the distribution of advertising funds.

• 1. administrative expenses - wages of a new employee, overhead costs, etc.;
• 2. expenses for purchasing advertising space (one of the largest items) - purchasing space on newspaper pages and pages of magazines, catalogues;
• 3. expenses for preparation and participation in exhibitions;
• 4. expenses for creating and maintaining a website, advertising on the Internet.

Considering that the work of Magnat-S LLC is controlled by government agencies and the lack of data on some costs, the calculations are made as indicative ones and can only be used for educational purposes.

• 1. Administrative expenses.
• - organization of a workplace for a new marketing specialist (furniture, office, equipment, etc.) = 5000 + 1000+13000 = 19,000 rubles.
• - increasing the wage fund due to additional staffing and additional payments to other employees performing additional functions.

For now we can only plan the salary of an advertising specialist. At this stage, the salary will be 15,000 rubles. Per year - about 180,000 rubles.

2. The costs of placement in specialized magazines and directories will also not amount to a significant amount at the initial stage, since the amount of funds for advertising is limited, and many directories post a minimum amount of information for free, and the cost of placement in most directories is 2-4 thousand rubles . for annual placement. We will limit ourselves to one “Price” directory, i.e. 6 thousand rubles, and for placement in the Stroyekspert magazine per quarter, excluding summer (vacation season), about 15,000 rubles. Per year - about 50,000 rubles.

Public relations costs. Since this task is also set for the future, the budget will be determined after an in-depth marketing analysis.

3. Expenses for preparation and participation in exhibitions.

The main costs of the exhibition: payment for exhibition space, registration fee, handouts. We are planning to participate in the XI specialized exhibition “Security Formula” in 2009. The cost of renting exhibition space and the registration fee is 6,600 rubles. The cost of producing handouts is about 3,000 rubles. Total for one exhibition is about 10,000 rubles. We plan to participate in three exhibitions in 2009. Total - 30 thousand rubles.

4. Costs of developing and maintaining the site.

To create a website, you should invite a specialist in this field. And the support and updating of the site will be carried out by an employee of the information department with the support and supervision of an advertising specialist. The average cost of creating a standard website in Chelyabinsk is about 20,000 rubles.

Stotal = 19000+180000+50000+30000+20000= 300,000 rubles.

Let's calculate the effectiveness expected after the appearance of an advertising specialist and the proposed activities.

The main material for analyzing economic efficiency

The results of the company's promotional activities are based on statistical and accounting data on the growth of turnover. Based on these data, it is possible to study the economic efficiency of one advertising medium, an advertising campaign and all advertising activities of the company as a whole.

The final conclusions about the economic effectiveness of advertising are obtained by comparing the additional profit received as a result of advertising with the costs associated with its implementation.

Let's calculate the economic efficiency of advertising using this method using the example of sales data for January-February 2009, when some advertising tools had already begun to be used - the Price directory and the first two issues of the Stroykomplekt magazine were published. Thus, the costs were: reference book - 500 rubles (6,000 rubles for 12 months), publications - 10,000 (5,000 rubles monthly). Total - 10,500 rubles.

Let's see how sales volume changed during these months (Figure 7).

Fig.7

There is a slight increase in sales, because Advertising activities are just beginning to be actively used in the enterprise and bear fruit. But, given that sales usually fall in January-February, an increase of 5 and 6.5% is quite noticeable.

The data in Table 6 indicates additional turnover after the use of advertising tools, which amounted to 62,197 rubles.

Table 6

Data on the sales volume of Magnat-S LLC before and after the use of advertising tools

Based on data from previous years, profit remains about 35% of turnover. Thus, the additional profit for January-February will be 21,768 rubles, and advertising costs will be 10,500 rubles. The total additional profit minus advertising will be 11,268 rubles. Consequently, these promotional activities were effective because they brought additional income.

The concept of efficiency in advertising, on the one hand, is closely related to the concept of economic efficiency in general, and on the other hand, it has its own specifics. The most general definition of efficiency is the ratio of the result and the costs incurred to achieve this result. In principle, this definition also applies to the effectiveness of advertising, where the degree of achievement of the goal set within the framework of advertising activities can be considered as a result, and the costs of achieving this goal can be considered as costs. At the same time, it is necessary to have a clear understanding of three key points, without which it is impossible to talk about the practical calculation of advertising effectiveness.

• 1. There are a number of limitations that have to be taken into account when analyzing the effectiveness of advertising - firstly, not everything and not always can be taken into account and calculated here, secondly, not everything that can be calculated can be valued, third, it is not always possible to accurately determine the result obtained from the implementation of advertising rather than other marketing activities.
• 2. The final effectiveness of advertising activities is influenced by both internal factors (the effectiveness of the advertising strategy, the effectiveness of advertising products and the effectiveness of the media plan), depending on the advertiser himself or his advertising agency, and external factors, independent of the actions of either the advertiser or the agency (market conditions, behavior of competitors, changes in consumer behavior, government influence on the market, etc.), and all of them must be analyzed separately.

Therefore, it is almost impossible to obtain absolutely accurate data on the economic effectiveness of advertising.

Efficiency = Total profit / Total costs

According to statistics, at Magnat-S LLC, the increase in turnover occurs annually by 50-60%, thus, the estimated turnover in 2009 will be 9,423,369 rubles, and expenses according to the same logic will be 9,208,432 rubles.

Thus, we calculate the efficiency at the same level of profit.

Efficiency = 9423369 / 9208432 = 1.023

Let's assume that the developed proposals will increase the enterprise's turnover by another 10%. The estimated turnover will be 6,478,566 rubles, and costs will increase by an average of 5%, that is, they will amount to an average of 6,043,033 thousand rubles. Based on these values, we will calculate the profitability of marketing activities.

Rb = T/Stot. x 100%

Where T is trade turnover, rub.; Stotal - total costs.

Rb = 6478566 / 6043033 * 100% = 107.3

Consequently, the costs of improving advertising activities will quickly pay off, and the expected effect from the proposed activities will not be long in coming.

One of the most important questions that clients ask us is: how to evaluate the effectiveness of online promotion, whether the costs are worth it, or which advertising channels are best to allocate the budget to.

To bookmarks

There are many performance metrics. Studying them is quite tedious. But if you understand the topic, it will be easier to estimate the costs of online advertising and the work of digital promotion specialists.

Each indicator is tied to one or another marketing goal. Marketing goals include: attracting leads and sales, increasing loyalty, brand awareness, increasing audience reach, working with companies.

We will consider indicators for purposes related to the sale of goods and services.

It is most convenient to evaluate effectiveness by the steps that a user goes through from a site visitor to a buyer. These steps add up to a conversion path.

Each step of the conversion path has its own indicators that help manage marketing, reduce costs and increase company profits.

Step 1. Potential client saw the advertisement

The goal is to attract to the site as many users as possible who are interested in the product or service. To do this, we evaluate how people react to the advertisement.

• CTR - ad click-through rate, how many people saw the ad and followed the link. Helps to understand how attractive the ad is to users. A low CTR indicates that the headline does not match the interests and desires of users, the offer is formulated unclearly, or the image in the ad does not attract attention.

• CPC is the cost per click, how much it costs us for one user who clicked on an advertisement to the site. The cost of a click depends on the quality of the ad, the number of competitors in the business niche, and the number and specifics of the audience. The narrower the target audience of a business and the more competitors, the higher the cost of transition will be.

These indicators are used to evaluate how well the audience has been studied and segmented, how well the creatives and headlines have been chosen, and whether the offer has been well written.

This is what it looks like in Yandex.Direct:

You cannot rely on the absolute values ​​of these metrics. They are different for different business niches, audiences, regions.

To select the optimal CPC value, split tests are carried out: they compare audiences, offer options for each segment, creatives, ad types (for example, it can be a video, a slide show, one image or an image carousel).

The higher the CTR of the ad and the lower the cost per click, the cheaper the advertising costs. But you can’t focus only on the lowest possible cost per click. Firstly, there is a ceiling on the advertising systems themselves: the lower the bid, the fewer times your ad will be shown and, as a result, there will be fewer conversions. And in pursuit of cheap traffic, the company risks receiving a flood of traffic from people who are not interested in purchasing, and losing target users who are willing and able to pay.

It is better to focus on the maximum CPC allowed for a business and not go beyond this ceiling. To do this, they study how clients are subsequently converted into buyers, what income the company receives from each sale and what costs it incurs.

Step 2. The person went to the site

On a website, visitors land on a landing page and then either leave immediately or perform a series of targeted actions. The goal is to keep as many visitors as possible on the site.

Behavioral metrics are used to evaluate user actions.

• Attendance, or traffic, is the number of site visitors who came from various sources: advertising, search engines, social networks, direct transitions. Divided into the number of unique visitors and the total number of visits. Once upon a time, advertising effectiveness was measured precisely by the total number of clicks to the site. Don't do that. The number of people who visited your website does not mean that they became customers and brought money to the business.
• Bounce rate is the number of users who left the site almost immediately or visited no more than one page. This indicator indirectly indicates either the inconvenience of the site’s usability, or the discrepancy between the advertising offer and the offer on the landing page. For informational sites, the bounce rate is irrelevant. The user could come to a specific article, get the necessary information, and at the same time stay for a short time. The bounce rate will be high, although the user has achieved his goal on such a resource.
• Browsing depth and time on the site - how many pages the user visited and how much time he spent on the site, respectively. A low value of this indicator does not always indicate problems on the site. For example, they are irrelevant for one-page websites.

These metrics are reflected in analytics systems and help to study the behavior of the target audience on the site.

Behavioral characteristics in the Yandex.Metrica traffic report:

Unsatisfactory behavioral characteristics may indicate
or an incorrect offer in the ad. Then visitors do not linger on the site and leave immediately.

It's important to keep a close eye on your bounce rate. Advertising systems analyze behavioral metrics and take into account the quality of content. Yandex, for example, announced that they had finally switched to the IKS - the site quality index - which takes into account the demand for the site by the audience.

Ads from those sites from which the user leaves immediately are shown less frequently on advertising platforms. The cost per click for such sites also increases.

Behavioral characteristics alone do not indicate the success or failure of an advertising campaign. They are used to calculate financial indicators when assessing marketing activities.

Step 3. The visitor completed a conversion action

At this stage, the first financial metrics appear to evaluate the effectiveness of advertising.

A conversion action is any user action that confirms his interest in a purchase and leads him through the sales funnel: viewing a specific page, responding to a chat, sending an e-mail or calling, moving an item to the cart, and the order itself.

A tool for tracking conversion actions - goals in analytics systems.

Google Analytics reports show behavioral characteristics for each goal:

The “Conversions” report in Yandex.Metrica shows the achievement of goals by users:

Goals are set up in accordance with the stages of the sales funnel on the site. Goals for an online store might look like this:

It is important to bring as many visitors as possible to each next stage of the sales funnel. To do this, conversion metrics are calculated.

• CR - conversion percentage. Shows what percentage of visitors completed a conversion action. The transition from one stage to another will reduce this indicator.

• CPA is the cost of a conversion action. Shows how much money was spent per user who completed a conversion action. It is calculated for each stage of the sales funnel and shows how much money we spent on bringing 1 user to a certain stage.

• CPO - cost of order.

A conversion action does not always mean an order, although an order is the most important conversion action on a website. That's why there is a separate metric.

The order can be made by phone. And the last action on the site that the client performed was to leave contact information for a call. Then, when calculating CPO, the cost of the call center manager’s work and communication costs are taken into account. Perhaps they will be insignificant per client. But you have more than one client, right?

The indicator values ​​for different business niches are different, but regardless of this, you need to strive to increase conversion and reduce the cost of the target action.

To increase CR, they study how conversion changes at each stage of the funnel, conduct a site survey, identify at what stages visitors drop out, and how much the site.

To analyze advertising effectiveness, CPA and CPO values ​​are calculated for each channel and campaign. These indicators are enough to make a decision about the work of contractors and marketers: whether the customized advertising worked well or unsatisfactorily.

Step 4. The visitor becomes a buyer

At this step, the client becomes real from a potential one, and the business receives income. The goal of the stage is to close the maximum number of transactions and receive the greatest revenue.

Indicators are needed to evaluate the performance of sales managers.

• LCR - percentage of closed transactions

An order is not the same as a purchase. The goal of all marketing efforts is to get the customer to pay. The percentage of closed transactions shows the ratio of those who left an order and those who bought.

• CPS is the cost of a closed transaction, it is calculated similarly to the CPA and CPO indicators; instead of the indicator of completed target actions, we focus on the number of closed transactions.

• The average transaction bill is an indicator that serves as a guideline for setting marketing goals, pricing, and planning advertising expenses.

These metrics help evaluate how much the cost of attracting customers is paying off, although they do not directly indicate the effectiveness of advertising. The data for their calculation is stored in the CRM system and Google Analytics with e-commerce tracking.

Step 5. The client becomes a regular buyer

The goal of this stage is to retain as many customers as possible and motivate them to make a repeat purchase.

Stage metrics provide insight into the conversion of marketing efforts into revenue. They allow you to evaluate the effectiveness of the entire marketing complex in the long term: including product quality, logistics system and internal management. Therefore, they are suitable as KPIs for business and marketing management.

• CAC - cost of attracting a new client

This is the sum of all investments to attract one new buyer. It is acceptable if the CAC is higher than the income from the initially attracted client. If you try to reduce this indicator to a minimum, there is a risk of losing clients who are ready to work with you for a long time.

• CARC - cost of attracting and retaining a client

An indicator that includes all costs associated with attracting and retaining customers. When calculating it, not only advertising costs are taken into account, but also the work of managers, salespeople, the maintenance of a point of sale, logistics, etc.

• LTV - customer lifetime value

Shows the profit per client for the entire time of his interaction with the company.

During initial acquisition, costs may be higher than the income the company will receive from the client. But this does not mean that the marketing worked poorly.

For this purpose, profit is calculated over the entire lifetime of the client. A person who has bought from you once and was satisfied is more likely to come to you again. This means that the cost of repeated attraction will be lower, the total income for the entire period of interaction will exceed the costs of the initial and all repeated attractions.

One of the options for calculating LTV

• ROMI - return on investment in marketing

This is the king of all marketing metrics. It is calculated as the ratio of a customer's lifetime value to the cost of attracting and retaining him. You need to rely on this indicator wisely. If you're calculating ROMI for marketing as a whole, it can be difficult to understand what contributed to the bottom line and how to repeat success or avoid failure in the future. Therefore, it is better to calculate it separately for various marketing activities and compare it with the complex ROMI value for the current and past periods.

If the ratio of LTV and CARC is close to one or less, top management needs to make decisions about more intelligent allocation of costs or even revising key business processes.

These indicators can be influenced at the level of marketing and business strategy. It is considered that the marketing strategy has been chosen correctly if the ROMI indicator is more than 100%.

It is possible to calculate these metrics only if there are integrations with a CRM system, IP telephony, call tracking and email tracking systems and sufficient qualifications of the marketing director. To do this, set up end-to-end analytics.

When we agree with clients on promotion goals, we use indicators for preliminary analysis and forecasting:

• At the initial briefing with the client, we learn about the business, target audience, average bill and cost of attracting a client.
• We conduct an initial audit of the site, evaluate current behavioral characteristics and conversion rates. To do this, it is important to gain access to indicators and analytics systems.
• Next, we study the niche, estimate the demand and size of the audience, the number of competitors, and make a forecast for clicks and the cost of transition.
• Based on the current site conversion rate, available budget, predicted CTR and CPC, we calculate possible CPA and CPO.
• We calculate the CTR and CPO values ​​that we need to strive for, based on information about the customer life cycle. Sometimes this information cannot be clarified from the client. For example, such data has never been collected. Then we focus only on the forecast indicators of CTR, CPO and average purchase price.

Based on the results of the reporting period - for us this is 1 month - we calculate the actual performance indicators and analyze whether there are any discrepancies with the plan.

In case of a significant deviation of reality from the planned values, we look for the reasons that influenced the result. To do this, we look at the conversion at each stage of the customer journey, and how much this conversion cost us. We pay attention to at which stages the bounce rate exceeded the average value, and where, on the contrary, clients easily completed the conversion action.

Please note that the planned values ​​of metrics are not the ultimate truth. It is important to use them flexibly to manage risks, rather than rigidly achieve indicators at all costs. After all, the result is influenced by many factors: from seasonality, changes in the competitive environment and information field to advertising system algorithms.

You can evaluate whether advertising is working well or not only based on the metrics of customer lifetime value (LTV) and all the costs of attracting and retaining a customer. This will be the desired assessment of marketing effectiveness - how much money you earn.

To summarize everything that has been said, we have made a reminder table. It brought together the indicators from the material and compared them with marketing goals and growth points.

Project risk management may be associated with increased sales due to the return on additional advertising. This implies an increase in advertising campaign costs. We will show how operational project management based on the growth of capital investments in advertising can increase income and change the risk of implementing a long-term investment project. At the same time, let us pay attention to the correspondence of the risk assessment to a certain period of time and its change depending on the period of time under consideration. Let us explain the calculations for risk management in this case in more detail. To do this, let's consider a conditional example and assume that the original investment project is still given, the cash flows for which were given in table. 7.1. We will assume that an increase in advertising costs in one period can lead to an increase in sales and an increase in income in the next period, and the corresponding ratio of an increase in advertising costs and an increase in income, i.e. cash flow component can be established experimentally or based on the experience of managers of a company implementing an investment project. Advertising costs during the period t (Нₜᵖ к) and a corresponding increase in cash flow components due to sales growth in the next period of time (ΔZ ₜ +1) are given in table. 7.3. For the sake of simplicity, we believe that the data presented do not depend on the period in which advertising costs are incurred.

Table 73

Advertising costs represent a certain part of the project costs. These expenses are offset by the increase in income they generate and the growth of the corresponding component of the project's cash flow in the next period.

The decision to increase advertising spending may result in a change in the cash flow component under every scenario considered, or only under some of them. Consequently, this changes the value of the expected net present value of the entire project, as well as a quantitative measure of risk (for example, standard deviation or coefficient of variation). Similar decisions can be made at different points in time.

For the sake of simplicity, let’s assume that the increase in advertising spending under consideration leads to the same increase in revenue under the conditions of all three future development scenarios under consideration. Considering the data in table. 7.3, it is necessary to find the optimal amount of advertising expenses in the zero and first years in order to ensure the greatest increase in the expected value of the net present value of the project and a reduction in project risk. Let's look at an example and explain the sequence of calculations.

Let's assume that advertising costs are expected to increase by 300 thousand in the zero year, and by 500 thousand rubles in the first year. In accordance with the data in table. 7.3 this will increase income for each of the three scenarios in the first year by 428 thousand, and in the second - by 685 thousand rubles. This increase in the cash flow components that relate to the first and second years will, in turn, lead to a change in the net present value under the conditions of each identified future development scenario. For example, under a favorable scenario, while maintaining the calculated interest rate of 22%, the net present cost of the project will be, thousand rubles:

The net present value of the project is determined similarly under the conditions of other future development scenarios (Table 7.4).

Table 7.4

Expected net present value of the project and project risk, thousand rubles. (with an increase in advertising costs in the zero year by 300 thousand and in the first year by 500 thousand rubles)

The risk in the form of standard deviation according to formula (6.4) will be:

It should be noted that the risk in the form of standard deviation, provided that advertising expenses are incurred in the first and second years, coincides with the risk of the project without taking into account these expenses. But at the same time, the value of the expected net present value of the project increases and becomes positive. This allows us to conclude that the risk of the project is changing, since the range of fluctuations in net present value values ​​shifts to the right. This fact is reflected in the reduction in the value of the coefficient of variation [(see formula (6.5)], which becomes equal

which is significantly less than in the original case.

Let's consider a plan for implementing advertising expenses, which involves increasing advertising expenses in years zero and one to 400 thousand rubles. This ensures an increase in income next year by 594 thousand rubles. The calculation results are given in table. 7.5.

Table 75

Expected net present value of the project and project risk, thousand rubles. (with advertising expenses in the zero and first years of 400 thousand rubles each)

Calculations of the expected net present value were carried out similarly under given scenarios of future development and a discrete change in advertising costs in years zero and one from 0 to 700 thousand rubles. (Table 7.6). We leave their justification for independent calculations (see practical task 2).

This changes the distribution NPV project from the original (see Table 7.1) to a new one that corresponds to this advertising investment plan. Table data 7.6 show that with an increase in advertising costs each year to 400 thousand rubles. the expected net present value of the project increases and then declines steadily. From the point of view of increasing the value of the expected net present value, it is obvious that the optimal option is to increase advertising costs in the zero and first years by 400 thousand rubles. This will lead to the fact that the maximum expected net present value of the project will be 112.38 thousand rubles. The distribution of income and values ​​corresponding to this plan NPV given in table. 7.5.

A change in advertising expenditure results in a change in the revenue stream, the expected net present value of the project, and the coefficient of variation, which shows the relationship between risk in the form of standard deviation and the expected value of the net present value of the project.

Table 7.6

Expected net present value of the project at various advertising costs, thousand rubles.

For the plan given in table. 7.5, the coefficient of variation, determined by formula (6.5), is

The values ​​of the remaining coefficients of variation are given in table. 7.7. We leave their justification for independent calculations (see practical task 3).

Table data 7.7 show that the minimum value of the coefficient of variation is achieved by investing 400 thousand rubles in advertising. in zero and first years.

Considering the data given in table. 7.6. and 7.7, we can conclude that an increase in advertising costs within the framework of this investment project becomes beneficial for the investor, since it leads to an increase in the expected net present value starting from an amount of 200 thousand rubles. Table 7.7

The coefficient of variation

At the same time, there is a reduction in risk, expressed in the form of the coefficient of variation. Increase in advertising costs in the zero and first years by 100 thousand rubles. is not profitable because the expected net present value of the project becomes negative. From the data in table. 7.6 and 7.7 it follows that with an increase or decrease in advertising costs above or below 400 thousand rubles. the expected net present value of the project only decreases, and the coefficient of variation only increases.

The most profitable project management strategy from the point of view of increasing the expected net present value of the project is to increase advertising costs in year zero by 400 thousand rubles, and in the first year by another 400 thousand rubles. In this case, the distribution of values NPV shifts to the right, into the positive area, the expected net present value reaches its maximum value equal to 112.38 thousand rubles. At the same time, the minimum value of the coefficient of variation is achieved, equal to 3.38 (see Table 7.7) and it will be possible to get rid of losses in the second year (see Table 7.5).

The decision to increase advertising costs in accordance with the above data should be made at the very beginning of the project. Operational management of the project is carried out after the start of its execution. In the process of such execution, it is necessary to take into account both the actual conditions of its implementation and the change in ideas about the future possibilities of its implementation, taking into account these conditions.

Let us assume that during the first period of time the most expected or most probable scenario for future development was realized, but market conditions changed during this period. In this case, we will assume that the return on additional investments in advertising changes. The corresponding data characterizing the volume of additional investments in advertising in the first year and the increase in income in the second year are presented in table. 7.8.

Table 7.8

We will assume that after the first year it remains possible to implement one of the three future development scenarios under consideration. But there was a clarification of the idea of ​​the settlement interest rate in the conditions of implementation of each of the scenarios under consideration. In a favorable scenario, the rate will drop to 20%, in an unfavorable scenario it will be 25%, and in the most likely scenario it will remain at 22%. A change in the calculated interest rate and a change in income from investments in advertising may lead to the fact that the above-determined volume of investment in advertising in the first period, equal to 400 thousand rubles, may not be the most optimal solution. The general sequence of realization of expected income under the considered scenarios, taking into account additional expenses in the first year on advertising, is presented in Fig. 7.1.

Rice. 7.1.

When carrying out calculations in this case, the expected changes in the settlement interest rate under the conditions of each scenario were taken into account. Cash flows, as well as the values ​​of the expected net present value and risk in the form of standard deviation with an increase in advertising costs in the first year by 200 thousand rubles. are given in table. 7.9. Let us explain these calculations in more detail. So, under the conditions of a favorable scenario, taking into account the data in table. 7.8 the net present cost of the project will be, thousand rubles:

Similar calculations were performed for two other future development scenarios. The results of calculations of the expected value of the net present value of the project and risk in the form of standard deviation are given in table. 7.9.

Given in table. 7.9 the expected value of the net present value and the amount of risk in the form of dispersion and standard deviation characterize the estimates of the values ​​of these parameters for the entire period of project execution at the end of the first year, provided that in year zero the decision on additional advertising costs in the amount of 400 thousand rubles was executed .

Table 7.9

In the first year, the most likely scenario was implemented and a decision was made on additional advertising costs in the amount of 200 thousand rubles. Obviously, in order to eliminate losses in the third year, it is necessary to conduct an advertising campaign in the second year.

Making such a decision during project execution increases the expected net present value of the project and reduces risk in the form of variance and standard deviation. The coefficient of variation also decreases significantly, which will be only

Table 7.10

Expected net present value of the project, thousand rubles, and risk, subject to an increase in advertising costs in the first year by 200 thousand rubles.

Similar calculations can be performed for all other options for investing in advertising (see Table 7.8). The results of calculations of the expected net present value, risk in the form of standard deviation and coefficient of variation depending on the increase in advertising costs in the first year are given in table. 7.11.

Based on the data in this table, we can conclude that the best solution, ensuring maximization of the expected value of the net present value and at the same time minimizing risk in the form of the coefficient of variation, would be an increase in advertising expenses in the first year in the amount of 300 thousand rubles, which does not coincide with the solution , determined in advance before the execution of the project. In accordance with it, this amount should have been equal to 400 thousand rubles. At the same time, there was a reduction in risk in the form of the coefficient of variation. Table data 7.11 show that the considered risk management method based on changes in advertising costs has a relatively small impact on the amount of risk in the form of standard deviation.

In table 7.12 shows three possible solutions. The first and second options are considered before the start of the project. The third - a year after it began. The use of an advertising campaign made it possible to shift the distribution NPV to the positive area, to the right along the numerical axis, which is reflected in a significant increase in the expected value NPV

Table 7.11

Values ​​of the expected net present value and coefficient of variation for various advertising expenses in the first year, thousand rubles.

Table 7.12

Comparison of the obtained solution options, thousand rubles.

At the same time, the risk in the form of standard deviation changes very little, so a more meaningful characteristic of risk is the coefficient of variation, the change of which occurred mainly due to an increase in the expected value of the net present value of the project. To achieve a more significant change in risk in the form of standard deviation, other risk management techniques must be used.

Comparing the data in Table. 7.12, we can conclude that the moment of making a decision to implement a risky project has a significant impact on the assessment of project risk and these risk assessments change over time. Therefore, decisions on the execution of a risky project and the conditions for its implementation must be constantly reviewed, adjusting the project taking into account the current state of the economy and the expected prospects for its change.

In the process of managing risks through advertising investments, a mixed type strategy was implemented, since it was possible to reduce the negative value NPV in an unfavorable scenario and get rid of losses in the second year and at the same time increase income in favorable outcomes (see Tables 7.5 and 7.10). The actual payment for the implementation of this risk management solution is 400 thousand in year zero and 800 thousand rubles. in the first year, i.e. corresponding amounts of expenses for an advertising campaign.