UNIVERSITY
OF MISSOURI-COLUMBIA
WQPZ-FM’s Budget
Creating a Budget for a Radio Station
It was that time of year again and Paul
Turner dreaded going to work on Monday, October 1, and begin the yearly
budgeting process. Paul was the General
Sales Manager of WQPZ-FM, a Country Music Radio station in a large Southeastern
market.
Monday morning, after his regularly
scheduled sales meeting, Paul made a list of the information he needed to put
together a revenue forecast for WQPZ for the coming year. Here is the list he made:
1.
Examine
Pacing Reports and salespeople’s by-account projections, full year and current
month.
2.
Examine
current Business Pending Report
3.
Examine
carefully Miller-Kaplan’s X-Ray Report on the Web of account activity and
schedules on competing radio stations and other media in the market.
4.
The
current monthly Miller-Kaplan Market Revenue Report, which also contained
year-to-date revenue share information for WQPZ
5.
A
three-year billing history by month
6.
Get
from traffic department sell-out levels by month and sell-out level three-year
history.
7.
Get
from traffic department average unit rate information by month this year and
last three years.
a. Estimate rates for next year
by quarter.
8.
Check
Program Director on projected inventory increases or decreases.
9.
Get
WQPZ-FM’s Program Director’s forecast of what the station’s rating, demos, and
PUR levels are for the coming year.
10.Estimate overall radio revenue market growth for
next year.
a.
Look
at Robert Coen’s estimates for overall advertising
expenditure and radio expenditure increases for next year.
b.
Get
national sales rep firm’s estimate for national revenue increases for 2003.
c.
Get
copy of
d.
Call
other sales managers and see what they predict the market will grow next year.
AUTHOR'S NOTE
This case was prepared to use as a
teaching tool and does not reflect an actual situation, although it
approximates the budgeting process for a major-market radio station.
ASSIGNMENT
1.
Estimate
market revenue percentage growth for both national and local. Examine the data in the Appendix.
2.
Using
your market revenue growth estimates, station financial data, and other
information in the Appendix, forecast total revenue by quarter and total
revenue for the full year for WQPZ-FM for 2003.
Show results in both dollars and percent increase over the previous
year.
3.
Include
in your forecast a rationale by indicating how you used the data and
information in the Appendix to make your forecast. In other words, justify your forecast.
APPENDIX
Contents
I. Pacing Reports (some stations refer to them as
Business-on-the-Books Reports or Revenue Reports) and salespeople’s by-account
projections, full year and current month.
II. Current Business Pending Report
III. Turner’s conclusions after examining Miller-Kaplan X-Ray Reports
online.
IV. Turner’s conclusions after examining the Miller-Kaplan Market
Revenue Reports
V. Turner’s conclusions after examining WQPZ’s
three-year billing history
VI. Turner’s conclusions after examining the station’s sell-out levels
year-to-date and last quarter of previous year and the station’s average unit
rates by time period and by month year-to-date and last quarter of previous
year
VII. The Program Director’s projected inventory
VIII. The Program Director’s ratings, demo, and PUR
forecasts
IX. Turner’s estimates for overall market growth
and rationale
I. WQPZ-FM’s
Pacing Reports and Salespeople’s Projections
1.
Download
from www.charleswarner.us in the Papers by Charles Warner link,
“WQPZ Pacing Report02”
2.
Download
from www.charleswarner.us in the Papers by Charles Warner link,
“WQPZ Pacing Report01”
The ’02 Pacing Report shows business on
the books, or revenue bookings for the first three quarters of the current
year, 2002. The first number in a column
is current pacing for Local business (all numbers are net, after advertising
agency commissions—15%—have been paid).
The second number in the column shows the revenue budget for the
station. The 81% in the second column
indicates that during the first quarter the station reached only 81% of its
Local budget. The third number in the
column shows the sales manager’s projection for the month. The 95% in the second column indicates that
during the first quarter the station billed 95% of what the sales manager
projected.
Paul Turner, WQPZ’s
sales manager, asks his salespeople to give him a yearly by-account revenue
projection, which they update monthly.
This system is common in the radio industry, although some stations go
overboard and ask for weekly projection updates. Turner examines the monthly projections from
the salespeople to make projections for upcoming months. He knows that the projections vary widely by
salesperson—some are optimistically high and some lowball—but he knows from
experience that in the aggregate the salespeople’s forecasts are pretty accurate,
especially in showing trends, so he bases his projections, to a large degree,
on the salespeople’s projections.
The fourth number in the first column is
the previous year’s (2001) pacing, and this year the station is 117% ahead of
the 1st quarter 2001, and 115% ahead of the previous year’s Actual, or final
revenue number for the quarter.
If you examine the remainder of the
numbers (Q2, Q3, and Year to Date), you’ll see that the station started off
slowly in Q1, but then steadily picked up speed and wound up the year making
budget (actually going over the budget by $27,260, not a full percentage point)
Year-to-Date. There could be several
reasons for the improvement: a ratings increase, better selling, better
pricing, better sales management, more inventory, or better economic conditions. However, Turner attributed the substantial increases to
three things: 1) A 10% jump in ratings and, thus, an increase in rank position
25-54 in the market (to #1); 2) an increase in inventory (at the first of the year,
the program director added one-minute of commercial time per hour to the
station); and 3) to his coming on board as sales manager at the first of the
year and reorganizing the sales department and account list assignments.
The ’01 Pacing Report contains numbers for
the last three months, Q4, and the Total Year for 2001, the previous year. From this report we can guess why Paul Turner
was appointed General Sales Manager at the first of the year 2002. WQPZ for the Total Year
paced (billed) only 98% (2% below) the previous year, 2000. The year 2001 was still enjoying the boom
from the Internet and dot.coms, although business
slowed after 9/11 and for the remainder of the year.
Radio station sales managers have the most
impact on the local sales staff, and for 2001, local was not performing
well. At the same time, the national rep
was doing sensational job of selling the station (up 169%), and network was up
an expected 144%. Thus, it was national
and network sales that were responsible for the station’s 2% increase in 2001.
Looking at the ’02 Pacing report, you can
see that Turner turned the local sales effort around substantially and the
national rep continued to improve its performance considerably. It is also clear that Turner is good at making
projections, as he was right on the money for 2002.
II. WQPZ-FM’s
Business Pending Report
1.
Download
from www.charleswarner.us in the Papers by Charles Warner link,
“WQPZ-FM’s Business Pending Report.”
2.
Download
for www.charleswarner.us in the Papers by Charles Warner link,
a “Business Opportunity Report.”
Salespeople at a radio station would fill out a similar report and the
information would be entered into an integrated traffic, accounting system by
clerical personnel.
Most large-market radio stations use
integrated traffic, accounting (contract entry and invoice), and sales force
automation (SFA) software systems that list avails and business pending. Such a system is that Integrated Radio
Systems (IRS), for example. A
business-pending report from IRS would be much longer than the hypothetical
WQPZ report and contain a large number of accounts and more information on the
number of spots purchased, rates, and cost-per-points and would issued
weekly. However, the WQPZ Business
Pending Report is a simplified one that is similar in some respects to an IRS
or other types of computer-generated reports, and is a monthly report.
Turner looked at the WPQZ Business Pending
Report for the current month very carefully, and what he saw was
encouraging. For the month of September,
there were 25% more pieces of business pending than in September of the
previous year (25 vs. 20). He also
noticed that the average number of weeks schedules were scheduled to run was down
this year form last—a trend he had seen all year long. Lead times were shorter than ever for
upcoming business.
He looked at the dayparts
this period versus last year and noticed that PM Drive and Nighttime were
relatively more in demand, probably because of the new package pricing he had
instituted earlier in the year. The
salespeople were doing a good job of packaging in nighttime.
Turner noticed with a sense of
gratification that the station’s won ratio was up to 72% from 60% a year ago,
due in large part to the increase in ratings and demo rank position, he felt.
Turner used the Business Pending Report
for a number of things, but, most important, he used it to predict demand on
the station’s inventory, which, in turn, helped him set pricing levels in the
coming weeks for the different dayparts. He decided to increase rates in AM Drive and
PM drive by 10% and Nighttime by 12% for the coming two months.
In terms of setting a budget for 2003, the
Business Pending Report was consistent with trends Turner has seen in previous
months and he was confident that demand would continue to trend upwards and
that he could plan for at least a 10%, perhaps even a 12%, average rate
increase for upcoming year.
III. Turner’s
Conclusions After Examining Miller-Kaplan X-Ray
Reports Online
WQPZ subscribes to the Miller-Kaplan X-Ray
Reports, which are re-packaged data from CRM, which monitors television
stations. The X-Ray reports provide
weekly and monthly data on what commercials ran on every radio and television
station in a market by advertisers, plus the X-Ray Reports include cost
estimates. The data in the reports can
be sorted in a variety of ways: by advertiser, by station, by category (beer,
fast foods, etc.). The cost estimates
are based on published rate card information, which produces inflated costs
because radio and television stations rarely charge what their published rates
indicate. In radio and television each buy is
negotiated separately and rates are highly volatile based on the laws of supply
and demand.
Even though rates were inflated, Turner
looked at the top radio and television stations’ rates over the last nine
months and was relieved to see that the rates were in line with what he
expected. None of the top stations
seemed to have dropped rates and held steady, if not increased rates, compared
to the previous year. This information
was consistent with what he learned from his salespeople, who were well trained
to bring back competitive rate information daily from the marketplace. He, therefore, predicted that, if current
conditions held steady or improved even slightly, rates would increase a
minimum of 5-6% in 2003, based on the rate trends in the X-Ray Reports and the
projected increased demand levels indicated by the Business Pending Reports.
Turner looked carefully at the X-Ray
Reports on the Web and sorted them by category and by account because he has
instituted a key-account management strategy in his sales department. Each salesperson had half-dozen large, key
accounts that they concentrated on and he tracked the activity in radio and
television of these key accounts to see if he could discern trends and to see,
especially, what accounts placed an inordinately high percentage of their media
weight in television—they were good targets for radio and for WQPZ.
Turner concluded from his examination that
there were about a dozen key local accounts that were spending heavily in
television and that would make excellent targets for radio. He estimated that if WQPZ could sell half of
these accounts, it could bring in $1 million, or about 8% of the estimated
$12,636,612 WPQZ would do for the full year 2002 ($9,250,000 YTD from “WQPZ
Pacing Report02” plus estimated Q4 2002 revenue of $3,386,612). A million dollars for 2003 would be nice he
thought; it would help replace the accounts (about 40%) that were traditionally
lost through attrition.
IV. Turner’s
Conclusions After Examining the Miller-Kaplan Market
Revenue Reports
1.
Download
from www.charleswarner.us in the Papers by Charles Warner link,
“WQPZ-FM’s Miller-Kaplan Revenue Report.”
Miller-Kaplan is the industry-standard
accounting firm that publishes revenue reports in many markets in the
Turner was gratified as he examined the
Miller-Kaplan report. WQPZ was the #1
billing station in September and virtually tied for #1 year-to-date (10.0 vs.
10.2 for the station above), a considerable improvement over the year before
when he was not the sales manager. The
national rep was doing an especially outstanding job of grabbing national
market share.
Doing some quick calculations, Turner was
able to determine that local, national, and total (network and other revenue
was not reported) revenue was up 4% over the same month last year and
year-to-date. He also saw that his
shares in September for local and total revenue were up in September over the
year to date, which meant that his staff was steadily improving—something he
saw in many other ways on a day-to-day basis.
This improvement nudged him slightly toward being a little more
aggressive in his forecast for the next quarter and for 2003.
V. Turner’s
Conclusions After Examining WQPZ’s
Three-Year Billing History
Turner looked at Pacing Reports for 1998,
1999, and 2000 (not provided for this exercise). What he saw confirmed what he already knew—WQPZ’s billing was relatively flat (2-3% increases per
year) for those three years. He also saw
that over a five-year period, 1998-2002 to date, that the billing patterns by
quarter and local-national-network were quite stable. Over those years the station’s total billing
was within a few percentage points of the following: Q1 - 17.5%, Q2 – 27%, Q3 –
28.7, and Q4- 26.8; unlike in television, where the pattern is: Q1 – 22%, Q2 –
27%, Q3 – 21%, and Q4 – 30%. Radio’s
first quarter is much weaker than television’s and the third quarter, summer,
is radio’s biggest because radio is at its peak of popularity in the summer
when television viewing is at its lowest level of the year.
Turner also saw that the following
patterns remained consistent over the years: Local – 74%, National – 23.4%,
Network – 2.6%. Turner was confident
that these percentages would hold for 2003 and he would base his forecast on
them.
VI. Turner’s
Conclusions After Examining the Station’s Sell-Out
Levels and Average Unit Rates
1.
Download
from www.charleswarner.us in the Papers by Charles Warner ,
“WQPZ Sell-Out Report”
Paul Turner had his traffic department
pull sell-out and average-unit-rate reports from the station’s computerized
traffic system. He then asked the
station’s accounting department to condense the data into a single sell-out and
average-unit-rate report by quarter in an Excel spreadsheet so that he could
generate “what-if” scenarios by changing rates and sell-out levels to see what
combination would come close to producing similar revenue to 2002.
It was a difficult process to estimate
unit rates by time periods because the station was formatted to accommodate 15
minutes of commercial time per hour, every hour. However, many advertisers used 30-second
commercials, and the station had a limit of 30 units per hour. Rates for 30-second commercials were not
one-half of the rate for a minute commercial, but were
usually 60-70%, or sometimes the same if demand was heavy, of the minute
rate. The average unit rates in the WQPZ
Sell-Out Report reflected an average of the revenue generated in a time period
divided by the number of units in that time period and then adjusted to
minutes. For example, if a 5-hour time
period in a day was 100% sold out and all the commercials were 30-seconds long,
150 units would have been sold, but only 75 minutes of time.
Looking at the final scenario in the WQPZ
Sell-Out Report (the one you downloaded), Turner was confident that he and his
local staff and the national rep could maintain the sell-out levels by quarter
in 2003 and that he could raise rates by 8-10% in the coming year.
VII.
The Program Director’s Projected Inventory
WQPZ’s program
director told Turner that there was no chance of increasing inventory above the
current 15-minutes, 30-units per hour limits. She had raised the limit to fifteen at the
beginning of the year at the urging of the general manager to increase revenue,
which she felt had hurt the station somewhat, even though ratings had not
declined.
Turner knew that there were only three
ways to increase revenue: 1) Increase inventory, 2) increase sell-out levels at
current rates, or 3) increase rates at current sell-out levels. Because the PD had indicated there would be
no more inventory, which meant he either had to
increase rates or sell-out levels.
Sell-out levels generally reflect demand, and Turner knew from
experience that lowering rates did not increase demand like in some businesses
(automotive, fast-foods, e.g.), so that is why he determined that increases for
next year would have to come from increasing rates. He had to be careful not raise rates too much
and risk loosing some business. He also
knew that his sales staff was well trained in creating value for the station
and in getting higher rates than competitors, and, he felt, it was the best
sales staff in radio in the market—it gave him confidence in projecting higher
rates.
VIII. The Program Director’s Ratings, Demo, and PUR Forecasts
The program director told Turner that she
expected WQPZ’s ratings to remain the same for next
year. In the previous year, the station
had a 10% ratings increase, partly due to a competitor in the Country Music
format switching formats and to a successful female, 25-54-oriented year-long
and heavily advertised promotion. She
expected to have another similar promotion with a slightly higher advertising
and promotion budget for 2003. She was
confident that the station could maintain its #1 share ranking 12+ and, more
important, #1 adults 25-54 ranking, the most desired demographic by advertisers
who buy adult radio. WQPZ was especially
strong in Women 25-54, with a substantial lead in this demo over its nearest
competitor. The program director liked
to joke, “Our target audience is me—a 37-year-old married female with two
children and who loves Country Music.”
The PD was a little worried about the
steady decline over the last two years in Persons-Using-Radio (PUR)
levels. She thought downloading music
from the Internet had had a negative impact on radio listening levels. However, of all the formats, Country Music
was the least affected, so the PD was not too worried for WQPZ.
IX. Turner’s Estimates for Overall Market Growth
and Rationale
Turner used several sources to estimate
market growth: 1) McCann-Erickson’s Robert Coen’s
annual estimates for advertising expenditures by media. Over the years, Coen’s
numbers were the most accurate of all of the media spending prognosticators,
and Turner and his corporate finance people had faith in Coen’s
predictions. 2) The national rep did
detailed projections that were usually accurate for national business and he’d
use their forecast. 3) The state
university did an annual estimate for retail sales in the state’s major markets
for the coming year. 4) He would call
several sales managers of competing radio stations, who he knew well, and would
ask them what they were forecasting for market increases for next year. 5) The Radio Advertising Bureau (RAB) also did a yearly
estimate, but it was usually too optimistic—it was trying to sell radio as a
medium, not necessarily trying to be realistic.
Here are the numbers Turner examined:
1.
Coen’s 2003 estimates for radio: National, Local = +5.5%
2.
National
rep’s 2003 estimates: National = +6.0%
3.
State
university 2003 estimates: Retail sales = +4.0%
4.
Market
sales managers’ average estimated growth: Total revenue = +6.2%
5.
RAB
2003 estimates: Radio = 12%
Turner knew network revenue would remain
the same for the coming year.