An advertising budget is an estimate of a company’s promotional expenditures over a certain time period. More importantly, it is the money a company is willing to set aside to accomplish its marketing objectives. When creating an advertising budget, a company must weigh the value of spending an advertising dollar against the value of that dollar as recognized revenue.
Advertising Budget and Goals
Before deciding on a specific advertising budget, companies should make certain determinations to ensure that the budget is in line with their promotional and marketing goals:
- Target consumer: Knowing the consumer and having their demographic profile can help guide advertising spend.
- Type of media that is best for the target consumer: Mobile or internet advertising—via social media—may be the answer, although traditional media, such as print, television, and radio may be best for a given product, market, or target consumer.
- Right approach for the target consumer: Depending on the product or service, consider if appealing to the consumer’s emotions or intelligence is a suitable strategy.
- Expected profit from each rupees of advertising spending: This may be the most important question to answer, as well as the most difficult.
Advertising appropriation is the portion of a total marketing budget that is allocated for advertising over a specific time period. The advertising appropriation policy for a company may be based on any one of a number of approaches. For example, spending an amount on advertising that is a fixed percentage of sales or based on the ad spend level of the competition.
In practice, the amount of the advertising appropriation is not very easy to establish. This is because of the lack of a definite relationship, in most cases, between the amount of advertising and the company’s sales and profitability. Advertising appropriation is also sometimes referred to as an advertising budget.
Advertising Appropriation Methods
There are a number of methods that may be used to determine the correct advertising appropriation for a given company. They include:
- Affordable Method: An advertising budgeting method that is based on what a company thinks it can afford to spend on marketing. This method may be unreliable, leading to too much or too little being spent relative to returns, because it is not based on a specific goal.
- Adaptive Control Method: Utilizes market research to estimate sales volume and profitability and adjust budget to assumptions.
- Competitive Parity Method: Bases advertising budget on what a company expects its competitors to spend. Operates under the assumption that competing firms have similar marketing goals and execute them rationally. One objective of this strategy is to avoid a price war.
- Return of Investment Method: A strategy that devises an advertising budget by balancing the amount of advertising to the profits generated from advertising.
- Objectives and Task Method: A budgeting strategy based on the cost required to achieve a business or sales objective.
- Percentage of Sales Method: Based on dedicating a fixed percentage of expected sales revenue to advertising. Despite for its simplicity, this method is criticized because it works contrary to the assumption that advertising leads to sales.
- Percentage of Profit Method: Similar to percentage of sales, this method bases ad spend on a fixed percentage of profits generated by a company a more reliable measure of success than percentage of sales.