What is an Advertising Budget?
The advertising budget is a certain percentage of the business firm’s total marketing expenditure which is basically estimated to use for advertising purposes.
In general, an advertising budget is a percentage share of the total marketing budget. The size of the budget usually depends on the nature of the product, advertising goals, strategies, targeted customer choice of media, etc.
Actually, it is a part of the company budgeting activities, where some sum of money is put aside for the purpose of effective advertisement of the goods and services. It is the investment of the company rather than an expenditure, a well-planned advertising budgeting, and its proper implementation aid up a very positive growth for the firm.
The role of all kinds of advertising is to create demand for products and services. The advertising budget should be relevant to the potential sales impact of the advertising campaign. This relevancy of advertising and its impact on potential sales is the price reason the advertising budget should be well planned.
Approaches/Methods for Setting Advertising Budget
The major approaches or methods for advertising budgeting can be listed below,
- Affordable method
- Competitive parity method
- Percentage of sales method
- Objective and Task method
- Top-Down method
- Bottom Up approach
- Arbitrary allocation method
- Expert opinion method
- All available funds method
Affordable Method
The affordable method for setting an advertising budget is the simplest method of all and is also called the fund available method. This method of budgeting is based on the capacity of the firm to spend on advertising activities.
As per this method, the firm goes for collecting funds for advertising only after all other expenses are met. It stands on the notion that any of the companies should not spend more money on advertising beyond its capacity. If the after all expenses, some portion of money remains company goes for advertising, if not company goes without advertising.
Competitive Parity Method
As its name suggests, the competitive parity method means setting up a budget as competitors are doing. Under this method, the marketer is set up as similar to the competitors to yield the same results the competitors are getting.
Competitive parity is a competitive model where the marketer tries to steal some profit from his rivals. In this type of budgeting, lots of money and time need to be spent to win the competition.
Percentage of Sales Method
In this approach, the company usually sets some specific percentage of the sales to put aside for advertising its products and services. Here, the amount of advertisement is determined on the basis of sales.
It is the most common method of advertising. It is said that, if the company has more sales, it will definitely spend more money on advertising whereas, if the company’s sales are less, it will spend less money on advertising.
However, most companies already determined the percentage to spend on advertising from sales. For eg., if A company’s percentage is 5% of all sales, if the company makes total sales of Rs. 20 million in the current year, the next year’s advertising expenses will of Rs. 10, 00, 000.
Objective and Task Method
This is the most managerial and appropriate approach to the advertising budget. In this approach, budgeting is based on the objectives of the company and advertising. Once the objective of advertising is decided, the further tasks needed to realize the objective is being set.
This method combines the objective and task to achieve the desired objectives. Generally, it goes through defining objectives, setting tasks to be performed, estimating the budget to perform such tasks, and realization of the objective.
Top Down Method
As per the top-down method of advertising budgeting, the top-level management only decides how much to spend on promotional activity. In this method, only the top manager has the right to decide on one promotional activity fund, after allocating the budget he passes it to his subordinates for implementation.
Today, this method is becoming obsolete as it seeks justification for every rupee spent.
Bottom Up Method
The bottom-up method is becoming more popular nowadays for advertising purposes. It is an activity-based and objective-oriented approach by managers.
Since the lower-level managers have real event information about the organization, the manager can get, analyze, be profit from the real-time data provided by his subordinates. Here, the whole budgeting process involves advertising department personnel.
Arbitrary Allocation Method
The arbitrary allocation method has no theoretical basis for allocating a budget. It lacks a system, process, or even thinking while setting up a budget.
This method is applied when the manager felt it is necessary. In simple words, arbitration allocation is when the manager allocates the budget and goes for spending when he feels important otherwise there is no pre-plan for budgeting.
Since it is no pre-plan and immediate budgeting, the rate of achieving the goal of this budgeting method is 50/50.
Expert Opinion Method
In this method of adverting budget, the marketer usually asks experts in advertising fields to take necessary steps in his advertising processes. Many marketers and firms think this method is useful.
The marketer can get suggestions from both external and internal experts. The internal experts are the senior members of the organization and externals are the outside of the organization.
All Available Funds Method
The all available funds method of the advertising budget is the most aggressive method among all the above methods. As its name suggests, the business firm spends all its money on the advertising of its offerings.
As it is aggressive, if everything goes as the firm expects, the firm will have a higher return, and if not the firm will be at a loss or even in the stage of collapse. However, this method is usually applied by the new firms who just arrived in the market and on new products promotion.
Pros and Cons of Advertising Budget
The advertising budget has certain pros and cons also,
Pros
- A good advertising budget guarantees the positive results one should expect from his promotional activities.
- It aids up a great role in the growth of the company.
- The company can monitor all the performance as how much money is allocated for advertising, much is spent, how it is performing, etc.
- Successful advertising helps companies to gain long-term goals and sustain in the future.
- The manager or marketer gets free from the burden since advertising and other budgets are already put aside for the activity.
Cons
- Sometimes the budgeting may be inaccurate which results in either expensive advertising or the wrong message delivered to the target market.
- Since the advertising budget calls for additional money, sometimes the product or service cost may be high which may disappoint the customers.