Advertising Budget

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The advertising budget of a business is typically a subset of the larger sales budget and, within that, the marketing budget. Advertising is a part of the sales and marketing effort. Money spent on advertising can also be seen as an investment in building up the business.

In order to keep the advertising budget in line with promotional and marketing goals, a business owner should start by answering several important questions:

  • Who is the target consumer?
  • Who is interested in purchasing the product or service?
  • What are the specific demographics of this consumer (age, employment, sex, attitudes, etc.)?

Often it is useful to compose a consumer profile to give the abstract idea of a “target consumer” a face and a personality that can then be used to shape the advertising message.

  • What media type will be most useful in reaching the target consumer?
  • What is required to get the target consumer to purchase the product?
  • Does the product lend itself to rational or emotional appeals?
  • Which appeals are most likely to persuade the target consumer?
  • What is the relationship between advertising expenditures and
  • What is the impact of advertising campaigns on product or service purchases?

Answering these questions will help to define the market conditions that are anticipated and identify specific goals the company wishes to reach with an advertising campaign. Once this analysis of the market situation is complete, a business must decide how best to budget for the task and how best to allocate budgeted funds.

The budget is an estimation of future advertising expenditure that will be used to implement managerial decisions, to maintain or improve profit result.

Procedures of Budgeting

The advertising budgeting procedure involved following stages;

  • Preparation of Budget: The advertising budget generally prepared by the advertising manager in consultation with marketing manager. The advertising budget mainly made on the basis of inputs such as; type of product, target market, demographic composition, advertising copy, and media; provided by the marketing research people.

  • Presentation and Approval of Budget: Once the advertising budget prepared by the advertising managers, it is presented in front of the top management for the approval.

  • Execution of the Budget: After approval, the approval process, the advertising manager execute the overall budget. At the time of execution, the budget allocation are to be considered for various activities.

  • Control of Budget: Once the advertising department of an organization execute the budget, the result come out. So in this stage of advertising budget process, the management ensures the correct use of advertising budget by evaluating the overall effectiveness of advertising programme.

Allocation of Advertising Budget

Following main aspects of a company which are considered by the management at the time of allocating the advertising budget on different activities.

  • Marketing Mix of the Company: Product, Price, Place, & Promotion

  • The sales forecast

  • Affordability (How much funds organization can invest)

  • The product life cycle

  • Type of the product

  • Quality of the campaign: If the advertising campaign is of high quality needed small budget

  • Level of competition

  • The budgeting cycle: (time period of budget), if budget made for six month, lesser money will be required then the budget for one year

  • Contingency Planning: There are many external uncontrollable restraints that must be taken into consideration while planning the budget

Advertising Budget Methods

Following are the main approaches used by the companies while setting the limit of advertising expenditure.

  • Top-Down Approach or Affordable Method
  • Bottom-Up Approach or Build-Up Approach

Advertising Budget Methods are:

  • Percentage of Sales Method
  • Arbitrary Allocation Method
  • Competitive Parity Method
  • Return on Investment (ROI) Method
  • Objective and task method
  • Payout planning method

Top-Down Approach or Affordable Method

When the budget amount or expenditure limit for advertising is established by the top management of the organization and then passed down to the various department called top-down approach.

Top Down Approach
Top-Down Approach

The top-down approach of budget setting includes following methods:

  • Percentage of Sales Method
  • Arbitrary Allocation Method
  • Competitive Parity Method
  • Return on Investment (ROI) Method

Percentage of Sales Method: This method is one of the most widely used method for setting the appropriation. “Percentage of sales method is based on the previous year’s sales, on estimated sales of coming year or on some combination of these two”

This method include following two:

  • Straight percentage of sales: In this method sales are project for the coming year based on the marketing manager’s estimation.

    2020 – Total Rs Sales – Rs 10,000,00 Straight percentage of sales at 10% – Rs 1,00,000
    2021 – Advertising Budget – Rs 1,00,000

  • Percentage of unit cost. 2020 – Cost per bottle to manufacture – Rs 4.00 Unit cost allocated to advertisement – Rs 1.00

    2020 – Forecasted Sales Rs 10,000 units 2015-Advertising Budget (10,000×1)-Rs 10,000

Arbitrary Allocation Method: In this method, the budget is determined by the manager solely (alone) on the basis of his/her judgment, or without any rationality or rule.

Competitive Parity Method: While keeping one’s own objectives in mind, it is often useful for a business to compare its advertising spending with that of its competitors. The theory here is that if a business is aware of how much its competitors are spending to advertise their products and services, the business may wish to budget a similar amount on its own advertising by way of staying competitive.

Doing as one’s competitor does is not, of course, always the wisest course. And matching another’s advertising budget dollar for a dollar does not necessarily buy one the same marketing outcome. Much depends on how that money is spent. However, gauging one’s advertising budget on other participants’ in the same market is a reasonable starting point.

Return on Investment (ROI) Method: This method, also referred to as ‘rate on investment’ or ‘incremental method’, considers advertising and promotion as investments, like plant and equipment.

Therefore, investment in the budgetary appropriation i.e. expenditure on advertising and promotion is expected to bring certain returns. This method measures the return in terms of increased sales on spending advertisement appropriation in comparison to the sales on not spending anything.

Bottom-Up Approach or Build-Up Approach

In this strategy the organization first determine all activities which are necessary for performing overall communication task and allocate funds on them, then the top management of the organization approve the limit as per needed task.

The bottom-up approach includes following methods:

Objective and task method: The objective and task method includes the following three steps.

  • Defining the communication objectives to be accomplished.
  • Determining the specific strategies and task needed to attain them.
  • Estimating the costs associated with performance of these strategies and tasks.

Payout planning method: The method is widely used for making advertising budget for the new product. A payout plan is developed to determine how much to spend.” The basic idea behind payout planning method is to project the revenues the product will generate over two or three years, as well as the cost it will incur.”

This method is based on the expected rate of return. This method is helpful for determining how much advertising expenditures will be necessary when the return might be expected.

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