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Lesson 6

The document discusses methods for setting an advertising budget, including top-down and bottom-up approaches. It explains that the budget is a subset of sales and marketing budgets and should be based on target consumers and media types. The top-down method determines the budget limit first while the bottom-up method sets activities and costs first.

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20 views

Lesson 6

The document discusses methods for setting an advertising budget, including top-down and bottom-up approaches. It explains that the budget is a subset of sales and marketing budgets and should be based on target consumers and media types. The top-down method determines the budget limit first while the bottom-up method sets activities and costs first.

Uploaded by

gckjwqqcy2
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ADVERTISING BUDGET; DIFFERENT METHODS OF SETTING

ADVERTISING BUDGET
LESSON 6

LEARNING OUTCOMES
1. Define and discuss the concept of advertising budgeting
2. Determine the process of setting advertising budget
3. Explain the various approaches that are used in setting advertising budget in real
world business

INTODUCTION OF ADVERTISING
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, 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.
• 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 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
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

1. 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.
2. 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.
3. 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.
4. Control of Budget: Once the advertising department of organization execute the
budget, the result come out. So, in this stage of advertising budget process the
management ensure 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.

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


b. The sales forecast
c. Affordability (How much funds organization can invest)
d. The product life cycle.
e. Type of the product.
f. Quality of the campaign: If the advertising campaign is of high quality needed small
budget
g. Level of competition
h. The budgeting cycle: (time period of budget), if budget made for six month, lesser
money will be required then the budget for one year.
i. Contingency Planning: There are many external uncontrollable restraints that must
be taken into consideration while planning the budget

APPROACHES FOR DETERMINE THE SIZE OF BUDGET


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

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.
The top-down approach of budget setting includes following methods
A. Percentage of Sales Method.
B. Arbitrary Allocation Method
C. Competitive Parity Method
D. Return on Investment (ROI) Method.

A. 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”
B. 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.
C. 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 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
D. 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.

A. Objective and task method

B. 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

SUMMARY

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. After
answering all the questions the defined process is followed for the setting of future
advertising expenditures (budget). And two basic approaches (i.e. top down and bottom
up) than followed for the final budget.

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