ADVERTISING BUDGET

ADVERTISING BUDGET
The advertising budget of a business typically grows out of the
marketing goals and objectives of the company, although fiscal realities
can play a large part as well, especially for new and/or small business
enterprises. As William Cohen stated in The Entrepreneur and Small
Business Problem Solver , "In some cases your budget will be established
before goals and objectives due to your limited resources. It will be a
given, and you may have to modify your goals and objectives. If money
is available, you can work the other way around and see how much
money it will take to reach the goals and objectives you have
established." Along with marketing objectives and financial resources,
the small business owner also needs to consider the nature of the
market, the size and demographics of the target audience, and the
position of the advertiser's product or service within it when putting
together an advertising budget.
In order to keep the advertising budget in line with promotional and marketing goals,
an advertiser should answer several important budget questions:
 Who is the target consumer? Who is interested in purchasing the advertiser's
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.
 Is the media the advertiser is considering able to reach 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 earned for each dollar spent on advertising?
Answering these questions will provide the advertiser with an idea of the
market conditions, and, thus, how best to advertise within these conditions.
Once this analysis of the market situation is complete, an advertiser has to
decide how the money dedicated to advertising is to be allocated.
 BUDGETING METHODS
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
Expert Opinion 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 rather 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. Critics of
this method, though, charge that using past sales for figuring the
advertising budget is too conservative and 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.
The method offers following merits:
(a) It is based on sales volume. Therefore, cost of advertising can be offset against
profits earned from the sales. It satisfies financial management.
(b) This method encourages marketing manager to think in terms of relationship
between promotional costs, selling price, and profits per unit.
(c) It maintains competitive parity. All firms in the industry spend approximately the
same percentage of sales for advertising.
(d) It keeps the company in constant touch with the sales target to be achieved.

The method has been criticized on following grounds:

(a) In absence of specific guidelines, it is not possible to decide the appropriate per
cent of sales. It lacks a scientific base.
(b) Long-term planning is not possible because a long-term sales forecasting seems
difficult.
(c) It neglects other objectives of advertising. Only sales are given priority. It doesn’t
consider the need of advertising.
(d) Stage of product life cycle is not considered.
(e) It is, to some extent, inflexible.
(f) It is assumed that only advertising affect sales. It is erroneous.
 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 to
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, which are often articulated in the "selling proposal," and
then develop complimentary advertising objectives, which are
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 that are 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.
Under this method, following steps are to be followed to set
advertising budget:
1. Determine main objectives of marketing department.
2. Set advertising objectives in terms of sales, profits, brand loyalty,
competitive stability, etc.
3. Determine advertising task in terms of various advertising activities
required to be performed to achieve the advertising objectives.
4. Estimate cost of each advertising activity for the defined period.
5. Make sum of costs of all the activities. It is the estimated amount for
advertising.
Thus, advertising budget is set on the basis of the objectives a company wants
to achieve and in what way it wants the objectives to be achieved. This
method is logically consistent and practically applicable for all the
companies. The method emphasizes on actual needs of the company. It is
considered as a scientific method to set ad budget.
 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 inform, persuade, and
remind (the three general aims of advertising) the consumer of
their products and services, then that business can, in order to
remain competitive, either spend more, the same, or less on its
own advertising. However, as Alexander Hiam and Charles D.
Schewe suggested in The Portable MBA in Marketing, a business
should not assume that its competitors have similar or even
comparable objectives. While it is important for small businesses
to maintain an awareness of the competition's health and guiding
philosophies, it is not always advisable to follow a competitor's
course.
Limitations:
(a) In case of a new product, the method fails to guide for deciding on
advertising budget.
(b) It is difficult to know in which stage of life cycle the product of close
competitor is passing through.
(c) Company differs in terms of sales, profits, challenges, financial conditions,
and so on. To follow competitors directly may be erroneous.
(d) Advertising is not the sole factors that affect the sales; interplay of many
factors determines sales.
(e) In case, when there are many competitors, it is difficult to decide as to
whom the company should follow.
(f) The method is followed only when there are dominant competitors. In
absence of competition, the method cannot be used.
(g) The method can make a sense only to followers and challengers. It is not
applicable to a market leader.
 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
advertiser wishes to sell.
 Expert Opinion Method
Many marketing firms follow this method. Both internal and external experts
are asked to estimate the amount to be spent for advertisement for a given
period. Experts, on the basis of the rich experience on the area, can determine
objectively the amount for advertising. Experts supply their estimate
individually or jointly.
Along with the estimates, they also underline certain assumptions. Internal
experts involve company’s executives, such as general manager, marketing
manager, advertising manager, sales manager, distribution manager, etc.
Whereas external experts involve marketing consultants, dealers, suppliers,
distributors, trade associations, advertising agencies, and other professionals
related to the field. Marketing consultants and advertising agencies provide such
services on professional basis.
Advertising budget recommended by external experts is more neutral (bias-
free) and, hence, is reliable. Experts considers overall situation and give their
opinion on how much a company should spend. Mostly, the experts consider all
the relevant factors related to advertising while deciding on advertising budget.
Merits:
(a) The estimates tend to be more balanced as various executives and experts are
involved.
(b) The budget is more accurate and realistic because the internal executives are well
aware of company’s strengths and weaknesses.
(c) It is the only option when a company is new, having no past experience.
(d) External experts tend to be more neutral as they are external to organisation
Demerits:
(a) It is not a scientific method. Personal value, experience, and attitudes play vital
role.
(b) It is difficult to fix responsibility of the final estimates as many experts contribute
to budget estimates.
(c) External experts are not fully aware of the company’s marketing situations.
(d) When more internal experts are involved, it may deteriorate relation due to
possible conflicts or lack of consensus.
(e) Possibility of prejudice or bias cannot be ignored.
(f) All opinions, right or wrong, are given equal importance
 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, for 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.
Limitations:
(a) The method completely ignores the role or need of advertising in
the competitive market environment.
(b) In long run, it leads to uncertain planning as there is no guarantee
that the company will spend for advertising.
(c) Except company financial position, other factors like company’s
need for advertising, consumer base, competition, and so forth are
ignored.
(d) This method only guides that a company should not spend beyond
its capacity.
(e) This is not a method in real sense.
(f) There is possibility of bias in deciding advertising amount.