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Methods of Setting of Advertising Budget

Advertising Budget

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Inder
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17 views

Methods of Setting of Advertising Budget

Advertising Budget

Uploaded by

Inder
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Methods of setting of 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.

There are several allocation methods used in developing a budget. The most common are listed
below:

 Percentage of Sales method

 Objective and Task method

 Competitive Parity method

 Market Share method

 Unit Sales method

 All Available Funds method

 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.

Objective and Task Method

Because of the importance of objectives in business, the task and objective method is considered by
many to make the most sense and is therefore used by most large businesses. The benefit of this
method is that it allows the advertiser to correlate advertising expenditures with overall marketing
objectives. This correlation is important because it keeps spending focused on primary business
goals.

With this method, a business needs to first establish concrete marketing objectives, often articulated
in the "selling proposal," and then develop complementary advertising objectives articulated in the
"positioning statement." After these objectives have been established, the advertiser determines
how much it will cost to meet them. Of course, fiscal realities need to be figured into this
methodology as well. Some objectives (expansion of area market share by 15 percent within a year,
for instance) may only be reachable through advertising expenditures beyond the capacity of a small
business. In such cases, small business owners must scale down their objectives so that they reflect
the financial situation under which they are operating.

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.

Market Share Method

Similar to competitive parity, the market share method bases its budgeting strategy on external
market trends. With this method a business equates its market share with its advertising
expenditures. Critics of this method contend that companies that use market share numbers to
arrive at an advertising budget are ultimately predicating their advertising on an arbitrary guideline
that does not adequately reflect future goals.

Unit Sales Method

This method takes the cost of advertising an individual item and multiplies it by the number of units
the business wishes to sell. This method is only effective, of course, when the cost of advertising a
single unit can be reasonably determined.

All Available Funds Method


This aggressive method involves the allocation of all available profits to advertising purposes. This
can be risky for a business of any size it means that no money is being used to help the business grow
in other ways (purchasing new technologies, expanding the work force, etc.). Yet this aggressive
approach is sometimes useful when a start-up business is trying to increase consumer awareness of
its products or services. However, a business using this approach needs to make sure that its
advertising strategy is an effective one and that funds which could help the business expand are not
being wasted.

Affordable Method

With this method, advertisers base their budgets on what they can afford. Of course, arriving at a
conclusion about what a small business can afford in the realm of advertising is often a difficult task,
one that needs to incorporate overall objectives and goals, competition, presence in the market, unit
sales, sales trends, operating costs, and other factors.

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