Advertising Budget

Definition: Advertising Budget
An advertising budget is the amount a company set aside for its promotional activities. Advertising
budget is used by a company for marketing the products and services to the customers. Advertising
budget includes money for doing advertising research, getting creatives made, printing material,
allocating money to advertising media and ensuring proper implementation of ad campaigns.
Importance of advertising budget
The objective of a company which markets its products is to earn profits and increase brand awareness.
Advertising objectives of a company is purely dependent on the advertising campaign, type of customers,
advertising media and what the company wants to achieve. Hence, for any marketing activity that a
company wants to do, it has to spend some money. This is why advertising budget is important. It helps in
understanding the objectives. The costs, helps to formulate strategies and generate profits by increasing
the overall sales.
Methods of setting advertising budget
1. Affordable method: This is a very simple method of budget allocation. After the budget has been
allocated in all the areas i.e. all the other expenses have been taken care of the company then allocates
the left over money for the advertisements. This method is also called “All you can afford”. Those
companies, which follow this method, consider advertisement as an expenditure and no expectations
on returns are associated with this method.
2. Arbitrary Allocation: This method seems to be a weaker method than the affordable method for
setting a budget. The arbitrary allocation method is completely dependent on the management’s
discretion and hence has no theoretical basis. The budget is determined by management solely. They
on the basis of what they feel to be necessary. So ultimately the decision depends on the
psychological and economical buildup of the people in the management and not on the market
requirements.
3. Percentage of Sales method: This is the most commonly used method for budget setting. Large
firms generally go by this method. According to this method, advertising and promotions budget is
based on sales of the product. Management determines the amount by either.
i. By taking a percentage of the sales revenue
ii. Assigning a fixed amount of the unit product cost to promotion and multiplying this amount by
the number of units sold.
4. Competitive Parity Method: This method involves setting budgets to match competitors’ outlays
and funds. In this method, the company monitors competitors’ advertising and follows it. This
method is generally used in markets in which advertising is heavier and it is felt absolutely important
to the companies not to be left behind the competitors.
5. 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.
6. 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.
7. 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.
8. Incremental approach: Also known as ‘Increase over Last Year’s Budget’. The budget of previous
year will be taken as a benchmark and calculate the current year’s budget by adding or subtracting
from it. Advertising cost is increased due to increase in price level of advertising inputs. So it is called
as ‘incremental budgeting’.
9. Return on investment method: In this method cost incurred for advertising will be taken as an
investment & not as an expenditure. According to this method we are investing on advertising with an
expectation of returning something more than invested. Income generated from advertising will
extends over a particular time period.

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Definition: Advertising Budget

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