An estimation of a company's
promotional expenditures over a period of time. An advertising budget is the
money a company is willing to set aside to accomplish its marketing objectives.
When creating the advertising budget, a company must weigh the trade-offs
between spending one additional advertising dollar with the amount of revenue that
dollar will bring in as revenue.
Companies can determine what
level to set their advertising budget several different ways, each of which has
its positives and negatives. A business can set its budget as a percentage of
sales, at the same level as its competitors, as the amount required to meet a
certain objective, as the entirety of its profits or as a function of the units
of product it wants to sell among others.
Advertising Budget
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:
1.
Who is the target consumer? Who is interested in purchasing the product or service, and 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.
2.
What media type will be most useful in reaching the target consumer?
3.
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?
4.
What is the relationship between advertising expenditures and the
impact of advertising campaigns on product or service purchases? In other
words, how much profit is likely to be earned for each dollar spent on
advertising?
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.
BUDGETING METHODS
There are several allocation
methods used in developing a budget. The most common are listed below:
1. Percentage
of Sales method
2. Objective
and Task method
3. Competitive
Parity method
4. Market
Share method
5. Unit
Sales method
6. All
Available Funds method
7. Affordable
method
It is important to notice
that most of these methods are often combined in
any number of ways, depending on the situation. Because of this, these methods
should not be seen as rigid but as
building blocks that can be
combined, modified, or discarded as necessary. Remember, a business must be
flexible—ready to change course, goals, and philosophy when the market and the
consumer demand such a change.
Percentage of Sales Method
Due to its simplicity, the
percentage of sales method is the most commonly used
by small businesses. When using this method an advertiser takes a percentage of
either past or anticipated sales and allocates that percentage of the overall
budget to advertising. But critics of this
method charge that using past sales for figuring the advertising budget is too
conservative, that it can stunt growth. However, it might be safer for a small
business to use this method if the ownership feels that future returns cannot
be safely anticipated. On the other hand, an established business, with
well-established profit trends, will tend to use anticipated sales when
figuring advertising expenditures. This method can be especially effective if the
business compares its sales with those of the competition (if available) when
figuring its budget.