1.1.1. Introduction
Budget is quantitative expression of future plan of activities. It is a future plan of activities expressed in terms of currency/rupees. It is prepared for a fixed period of time. Advertising budget is a financial document that shows the total amount to be spent on advertising and lists the way this amount is to be allocated. It is a translation of advertising plan into money to be spent on advertising. It is an estimation of total amount to be spent on advertising during a given period of time for achieving marketing objectives. It involves allocation of a portion of total marketing resources to advertising functions of a firm. An advertising budget shows how much amount is to be spent on advertising and how this amount will be allocated among different media, sales territories, products, selling-activities, etc. It states the proposed advertising expenditure and serves as a decision-making tool for the management while allocating available funds to the various advertising functions and related activities of the company. Advertising budget and its process is similar with the Sales Promotion budget and Integrated Marketing Communication (IMC) budget. All three terms can be used interchangeably also due to close similarity. Advertising budget is prepared by Advertising Manager in consultation with Marketing Manager of the company. But in small business organizations, which do not have separate advertising department, the responsibility of preparing ad-budget lies on top management or Marketing Manager. According to the Institute of Cost and work Accountant London, “A budget is a financial or quantitative statement prepare prior to a definite period of time; of the policy to be persuade during that period for the purpose of achieving a given objective”.


Features of Advertising Budget

The features of advertising budget are as follows: 1) Advertising budget is a financial statement expressed in monetary terms, 2) It is for a specific future period. It is prepared prior to the budget period during which it will operate, 3) It is prepared by Advertising Manager. It is approved by top management for its implementation, 4) It shows the plan of allocation of available funds to various advertising activities, 5) It affects the selection of media, selection of advertising agency and selection of message source (model for advertisement), 6) Its size depends on various internal and external factors, and 7) It is a limiting factor which determines the size of advertising campaign.

1.1.3. Advertising Budget as a Concept of Investment
Advertising budget is assigned to build the image and reputation of the organization. The achievement of the budget is observed over a long period. Some of the expenditure on advertising attracts customers immediately; they buy the product when they listen to or view the advertising message. This expenditure is known as revenue expenditure. Some expenditure is incurred on building the image and reputation. The effects of advertising are realized gradually over a long period. This expenditure is capital expenditure or investment. The expenditure on advertising is accepted as revenue expenditure by the income-tax authorities. The marketing manager is authorized to control and spend the money assigned to him for advertising purpose. Advertising expenditure is a capital investment when it is incurred to build the image, goodwill and reputation of product and company; and this results in a gradual increase in the sales, although the expenditure is considered as revenue expenditure in the accounting entry. It is an outlay or expenditure made today to achieve benefits in future. This expenditure is known as capital investment although it is assigned under the revenue budget but it is not accepted as a capital budget.

1.1.4. Factors Influencing the Size of the Advertising Budget
Following factors affect the size of advertising budget:

Hence. the advertising spending gets reduced considerably. it calls for the heaviest doses of advertising. and therefore. In case of convenience goods. However. On the other had. . convenience. Services goods such as automobiles. entering a new market. shopping and specialty. building a brand preference. T. say. 7) Size of the Company: It goes without saying that a bigger company with vast financial resources within its easy reach will have definitely liberal advertising budget. 2) Coverage Expectations: Advertising coverage implies the number of persons to be reached. only 3 percent of its sales. 3) Product Class: Talking of only consumer goods. When a new product is introduced. majority of the companies cut back the advertising budget and during the period of boom conditions. On the other hand. they fatter their budgets beyond limits. these have been classified into three categories. they require a large advertising expenditure because of their intensive distribution and heavy dependence on mass advertising to sell in advance to the prospects before they shop. These objectives are – bringing about increase in sales. The economic system faces brisk and slack phases which are referred to as boom and slump phases of business cycle. kitchen-wares and the like warrant heavy doses of advertising and personal selling efforts. maturity and decline. During the growth stage. the business community thinks advertising as recurring expenditure than an investment. expanding industry’s sales. washing machines. 4) Stage in the Product-life Cycle: Every product has its life-cycle consisting of four phases. counter acting competition. Objectives act as the sheet anchor and the standards for advertising performance. when the product reaches the stage of maturity or saturation and the stage of decline. supporting sales force. introduction of new products. growth. namely. It is a particular sales objective or the set of objectives that shapes the advertising budget. it is the price appeal that works than the advertising strategy. During the sour economic conditions. fridges. cooking ranges. namely. the funds spend are really substantial. dispelling the likely misunderstandings and so on. reaching inaccessible consumers. It is the question of reaching a target audience through different media and media vehicles.V sets. a new company that has not introduced itself will sweat in introducing its products. for a small company. On the other hand. Even if it decides to spend. 6) Age of the Company: A company which is seasoned and is known to the consumers will have certainly an advantage in introducing a new product or a service. The extent of coverage is influenced very much by the nature of the market enjoyed by the products. building up goodwill. the fashion goods require less advertising as the buyers can judge the qualities of these products themselves in person while they hop from shop to shop. People readily accept the new product in the light of its past dependable performance. the advertising funds will be quite substantial and the desired effects or results can be brought about easily. This has been because. it would work out almost 24 per cent to 30 per cent of its sales to earmark the amount equal to that of a big company. improving dealer relations. the budget gets blown-up. 5) Prevailing Economic Conditions: The economic activities are not always the same. introduction.Factors Influencing the Size of the Advertising Budget Objectives to be Attained Coverage Expectations Product Class Prevailing Economic Conditions Age of the Company Size of the Company Competitive Activities Funds Available Approach to Advertising Stage in the Product-life Cycle 1) Objectives to be Attained: How much the company is going to spend is determined by the objectives to be attained.

If it finds the budget justified and within affordable limit. This requires a good knowledge of various activities of an effective advertising campaign. Thus. It will also ensure that all the required activities to achieve advertising objectives have been covered and the rates/cost of various activities is competitive. selection of media. In large organizations. 10) Approach to Advertising: The amount to be spent on advertising is also depending on the way in which it is looked upon. While determining the activities to be performed the advertiser keeps in mind the activities done last year and activities of competitive concerns. it is presented before topmanagement.1. they are of no avail as they cannot be realized as funds are not available.5. Main advertising objectives can be to achieve the desired level of sales. to develop preference for our product and to convince the customers to buy our product. Traditionally. the company has got to be satisfied with less ambitious workable size of the budget as forced by the financial stringency the company conditions put. reviewed and scrutinized by high-powered-budget committee before submitting it to the top-management for final approval. It is possible only when the advertiser knows –How much is his competitor spending? What is the format of his spending? What is his strategy? And so on. Top-management can impose ceiling on proposed budget and send it back to budget-committee for necessary review. functions to be performed Figure 2. Total cost of all such activities is the amount required for advertising-budget. Top-management will see if the budget is affordable. certain amount in the form of provision for contingencies is added to the total cost. the advertising manager must be clear about advertising objectives. activities. deciding frequency of advertisement. however. selection of advertisingagency. After approval by budget committee.11: Process of Advertising Budget to achieve the advertising objectives. Preparing Advertising Budget to increase awareness regarding product and its uses. The success of the advertiser rests on the strategic approach and spending. now-a-days. Budget committee will ensure that proposed budget will be effective enough to achieve advertising objectives. 1. etc. 3) Preparing Advertising Budget: After identifying various activities to be done to achieve advertising objectives. Most of the companies use their competitors’ budget pattern as their model for budget purposes. To keep the budget flexible. The advertising manager has really wonderful ideas to increase the sales. need based and justified. quantum of space to be taken in print media. 4) Approval: After preparing advertising budget. 2) Determining Tasks to be Allocation of Advertising Budget Performed to Achieve Advertising Objectives: After identifying advertising-objectives. it is sent to top-management through marketing manager for necessary approval. Process of Advertising Budget Advertising budget is prepared by advertising manager in consultation with marketing-manager of the company. These objectives should be clearly defined in quantitative Determining Tasks to be terms so that amount of advertising budget can be decided for achieving performed to Achieve Advertising Objectives these objectives. timing of advertisement. the attitude and philosophy has undergone a thorough change and it is more looked upon as an investment than a mere current expenditure because it has long-term cumulative effects on the company efforts and results. the next step Monitor and Control is to determine tasks. However. then it will pass the budget. this proposed ad-budget is evaluated.8) Funds Available: An absolute limit is put on the advertising budget by what a company can afford irrespective of its age and size. . strategies. it has been accepted as the current expenditure like any other selling expenditure. to enhance market share by specific percentage. Finance is a major key factor or principal budget factor that dictates the size of the advertising budget. These tasks may include. designing of advertisement copy. These objectives will help the advertising manager to determine Approval and to allocate the ad budget. The advertising budget process involves the following main steps: 1) Setting Advertising Objectives: Before deciding on advertising Setting Advertising Objectives budget. profits to the firm and the satisfaction to the consumers. 9) Competitive Activities: It is the ability to size up the competitor or competitors and their activities than the ability to spend that pays rich dividends at times. the next step is to find the cost of all such activities.

competitors strategies. a firm would continue to spend advertising/promotional dollars as long as the marginal revenues created by these expenditures exceeded the incremental advertising/promotional costs. company’s promotional plans. but then they level-off. Advertising budget is allocated on various product-lines. In case actual expenditure is more than planned expenditure. advertising research. sales-territories. etc. especially personal selling. actual expenditure is compared with planned expenditure. Using this theory to establish its budget. Allocation means dividing the advertisement budget on different products and activities. If the sum of the advertising/promotional expenditures exceeded the revenues they generated. If revenues were higher. to reduce wastage in ad-expenses and to increase efficiency in various advertising activities.5) Allocation of Advertising Budget: After the budget is approved by the top management. Advertisement effectiveness is monitored and evaluated in the light of the budget appropriated.6. While allocating the advertising budget to different activities/territories/products. one would conclude the appropriations were too high and scale down the budget. As shown on the graph. a higher budget might be in order.12 graphically represents the concept of marginal analysis. In control. It involves determining which market. nature of tasks required to achieve advertising objectives. charges of advertising agency. then corrective-actions are taken and responsibilities are fixed to ensure cost control over advertising-budget. 1.12: Marginal Analysis . market size. the next step is to allocate it. to produce effects that are greater than the sum of their separate effects? The answers to two of these questions can be found in the conceptual framework of the models discussed below. Advertising-allocation depends upon company’s policies. Monitoring and control of ad-budget is necessary to make maximum-utilization of funds. Theoretical Approaches to Budget Setting There are three important issues need to look over before making advertising budget decisions: 1) Economies of Scale: Is there some relevant range in which increments of advertising yield increasing returns? 2) Threshold Effects: Is there some minimum level of exposure that must be exceeded for advertising to have a discernible effect? 3) Interaction Effects: Does advertising interact with each element of the marketing mix. Budget allocation should not be very rigid. The logical process of arriving at the communication budget is inspired by the marginal analysis rooted in economics. 6) Monitor and Control: After allocation of advertising budget. Figure 2. stage of product life-cycle. Advertising manager should be authorized to make necessary modifications in allocation of advertising-budget. it is essential to have an adequate monitoring and control over it. with the latter taken as a function of the former: 1) Marginal Analysis: As advertising/promotional expenditures increase. etc. the optimal expenditure level is the point where marginal costs equal the marginal revenues they generate (point A). product. and the relationship of communication expenditure with sales. Profits are shown to be a result of the gross margin minus advertising expenditures. promotional element will receive how much of the amount of funds appropriated. competitors’ strategies and change in other components of marketing environment.1. sales. product items. media. Sales (`) f(A) = Sales A = Advertising/promotions expenditures Mf(A) = Gross margin Fixed cost of advertising Advertising/ Promotions (`) A P = Mf(A) – A = Profit Figure 2. and gross margins also increase to a point. the budget should have flexibility to accommodate sudden changes in the market.

These weaknesses include the assumptions that: i) Sales are a Direct Measure of Advertising and Promotions Efforts: The fact that the advertiser needs to set communications objectives that contribute to accomplishing overall marketing objectives but at the same time they are different. . certain weaknesses limit its usefulness. to demonstrate the effects of advertising and promotions on sales. One reason for this strategy is that it is often difficult.Assumptions of Marginal Analysis While marginal analysis seems logical intuitively. it has been almost impossible to establish the contribution of advertising and promotion. if not impossible. Using sales as a direct measure.

and other communications objectives are often sought. The relationship between advertising and sales has been the topic of much research and discussion designed to determine the shape of the response curve. A more logical approach would be to examine the impact of various budgets on the attainment of communications objectives.According to Frank Bass. Initial outlays of the advertising budget have little impact (as indicated by the essentially flat sales curve in range A). these objectives may serve as the basis on which the promotional program is developed. interest. After a certain budget level has been reached. Awareness. and distribution – which do contribute to a company’s success. i. according to the concave-downward function model. advertising and promotional efforts begin to have an effect. Environmental factors may also affect the promotional program. Thus. product. as additional increments of expenditures result in increased sales. as shown in figure 2. because at the beginning of range C additional expenditures begin to return little or nothing in the way of sales.e. “There is no more difficult. the effects of advertising quickly begin to diminish. i) Concave-Downward Function: After reviewing more than 100 studies of the effects of advertising on sales. leading the Marketing Manager to assume the advertising was or was not effective when some other factor may have helped or hindered the accomplishment of the desired objectives. ii) Sales are determined Solely by Advertising and Promotion: This assumption ignores the remaining elements of the marketing mix – price.. However. Sales are not the only goal of the promotional effort. which projects an S-shaped response function to the budget outlay (again measured in sales). Marginal analysis is seldom used as a basis for budgeting (except for direct-response advertising). while those less likely to buy are not likely to change as a result of the advertising. While the economic approach to the budgeting process is a logical one. and while the bottom-line may be to sell the product. For those who may be potential buyers. to try to show that the size of the budget will directly affect sales of the product is misleading. This model suggests a small advertising budget is likely to have no impact beyond the sales that may have been generated through other means (e.13 a. “Looking for the relationship between advertising and sales is somewhat worse than looking for a needle in a haystack”. the difficulties associated with determining the effects of the promotional effort on sales and revenues limit its applicability.13 a): Concave-Downward Response Curve ii) S-Shaped Response Function: Many advertising managers assume the S-shaped response curve (figure 2. Thus. . Almost all advertisers subscribe to one of two models of the advertising/sales response function: the concave-downward function or the S-shaped response curve. According to David Aaker and James Carman. The logic is that those with the greatest potential to buy will likely act on the first (or earliest) exposures. (the beginning of range B).12 shows sales leveling-off even though advertising and promotions efforts continue to increase. Incremental sales Advertising expenditures Figure 2. its incremental value decreases. This incremental gain continues only to a point. each additional ad will supply little or no new information that will affect their decision. Budgeting under this model suggests that fewer advertising dollars may be needed to create the optimal influence on sales. complex. Julian Simon and Johan Amdt concluded that the effects of advertising budgets follow the microeconomic law of diminishing returns. or controversial problem in marketing than measuring the influence of advertising on sales”. 2) Sales Response Models: The sales curve in figure 2.g.13 b). as the amount of advertising increases. attitude change..

Budgeting Methods used for Fixing Ad Budget The various budgeting methods used for determining the ad budget takes several forms as shown in figure below. At the other extreme. 1.13: Advertising Sales/Response Functions Weaknesses in these sales response models render them of limited use to practitioners for direct applications. measurement problems.7. Some companies like mining . etc. Many of the problems seen earlier – the use of sales as a dependent variable. the amount to be appropriated for advertising is arrived at by multiplying the value of past year’s sales or projected sales for the budget period with a pre-determined percentage. level of competition. Percentage of Sales Method Under this method. Advertising Budget Amount = Past Year’s Sales or Anticipated Sales × Pre-determined Percentage The percentage depends upon many factors like nature of product. one would attempt to operate at that point on the curve in area B where the maximum return for the money is attained. As with marginal analysis. and so on – limit the usefulness of these models. Even though marginal analysis and the sales response curves may not apply directly. amount spent on advertising by competitors. they give managers some insight into a theoretical basis of how the budgeting process should work.1. keep in mind the purpose of discussing such models. At the same time. Incremental sales Range A Range B Range C b) S-Shaped Response Function Figure 2. availability of funds. Some empirical evidence indicates the models may have validity.1. stage of product life cycle. Budgeting Methods for Advertisement Percentage of Sales Method Competitive Parity Method Objective and Task Method All you can Afford Judgment Method Increase over Last Year’s Budget Return on Investment Method Quantitative Methods Experimental Approach 1.7. more does not necessarily mean better: Additional dollars spent beyond range B have no additional impact on sales and for the most part can be considered wasted. These ad budgeting methods are also termed as the types of ad budget.word-of-mouth).1.

4) Satisfactory: Since this method directly relates advertising expenditure to sales. For example. 2) Arbitrary: The percentage on sales is fixed arbitrarily and not scientifically. the second company should spend more than the first company so that it can increase its sales. Under this method. But in reality. Companies with more sales spend more on advertising and companies with fewer sales spend less on advertising. company should spend more on advertising so that it can regain its earlier position and can reverse the trend of declining sales. By doing so. Now as per the need. there are say two similar companies in the same industry. sales affect advertising expenditure. Future sales will probably be more than past sales as a result of advertising.companies. second company will spend less on advertising. 3) Baseless Results when Sales are Declining: This method gives very dangerous results in a case where sales are declining. the appropriation of advertising will be high. If advertising expenditure is high. Another base followed in this method is ‘unit of sales’. Demerits of Percentage of Sales Method Although this method is very popular method of framing advertising budget. it suffers from some weaknesses which are as follows: 1) Illogical: It is illogical method because as per this method. It is also named as fixed-sum-per-unit of product method. But it is very difficult to make reliable and accurate estimate of future sales. workable and easy to understand. For example. 3) Prevents Advertising Wars: It helps the industry in preventing advertising wars because advertising expenses are proportionate to market share in sales. specific amount of rupees is allocated to the advertising budget for each unit sold.e. 4) Considers Advertising Expense as Dependent Variable on Sales: This method considers advertising as result of sales. the need is just opposite to it.. it may result in higher sales and if advertising expenditure is decreased it may result in decrease in sales. But in reality. In such a case. steel-companies appropriate 1% to 2% of sales for advertising budget. the appropriation to advertising budget should be more to overcome the problem of decreasing sales. But as per method of percentage of sale. i. while consumer-productcompanies like cosmetic-companies appropriate 30% to 40% of sales for advertising. it seems to be very satisfactory to many advertisers. A company with fewer sales should spend more on advertising so that it can push up its sales. appropriation to advertising will be low. Here past sales or future sales can be taken as base for determining ad-budget. It is based on the assumption that a specific amount of advertising is required for marketing each unit. 2) Flexible: The advertising appropriation does not remain fixed. There is no scientific method for fixing this percentage. Merits of Percentage of Sales Method 1) Simple: This method is simple. appropriation of advertising will be high. If past or projected sales are high. So in this method. the company with more sales will spend more on advertising and the company with fewer sales will spend less on advertising. It is useful in the advertisement of specialty goods of high-unit-price. But the fact is that advertising affects sales. As per this method if sales are high. this method considers advertising as a . advertising budget is decided on the basis of level of sales. Hence. if sales of a company are ` 20 lakhs in first year and ` 16 lakhs in second year. The past sales may be of immediate previous year or average sale of preceding two or three years. as per this method advertising budget would be less whereas in reality. The sale of first company is ` 50 lakhs and sale of other company is ` 40 lakhs. But taking sale of past years may be wrong as previous year’s sales may not be realistic forecast of future sales. Advertising expenditure should be related to sales volume the advertisement is expected to produce. If sales are low. Some companies take future sales as a basis for advertising-budget. advertising efforts are related to future needs and future conditions. It fluctuates directly with sales. then according to this method appropriation to advertising will decrease by same percentage.

sale is the basis for appropriating advertising budget. management has to consider the advertising appropriations of competitors to keep itself in line with its competitors. this method is very popular and is widely used.. 1. Despite the above weaknesses and criticism. It assumes that the promotion needs of the organization are the same as that of competitive concerns or rivals. sales are very low and if the percentage of sale method is used for appropriating the budget. If we spend very less on advertising than our competitors. Here advertising is taken as a defensive tool and not as offensive tool to achieve marketing-objectives. . Competitive Parity Method It is a traditional approach in which advertising budget is framed in such a way that our company is at par with competitors in spending money on advertising. 3) Logical: The purpose of advertising is to save its market share from competitors and to increase its sales.2.1. It is also assumed that competitors have similar marketing problems and environment.7. i. comparison with other rivals makes the company alert of its excessive or meagre spending on advertising. 2) Check on Excessive or Meagre Budget: Comparison of advertising budget with that of rival companies puts a check on excessive advertisement budget. These are as follows: 1) Spend the same rupee amount on advertising as major competitor does. 6) Not Much Useful for Long-Term Advertising Programmes: In this method.e. Thus. Merits of Competitive Parity Method 1) Considers Level of Competition: This method is most appropriate where competition is very rigorous. This method is based on the assumption that the company in question knows what competitors are doing and what competitors are planning to do. Competitive parity budgets can be determined in several ways. It also assumes that competitors have framed their advertisement budgets correctly and rationally. competitors might have made their ad-budgets in a haphazard manner. level of competition. But in reality. But sales vary from year to year and from market to market. 2) Spend the same percentage of sales on advertising as major competitor does. 5) Baseless Results in Introduction Stage of Product-Life-Cycle: This method gives inappropriate results if the advertiser has introduced a new product in the market. the actions of competitors largely affect the company’s advertising budget. advertisers spend as much as their competitors spend so that their company is not at any disadvantage.‘result of sales’ whereas the fact is that ‘advertising results in sales’. Under this approach. It involves collection of relevant data about competitors advertising appropriation. 3) Spend the same percentage of sales on advertising as the average of entire industry. In the introduction stage. So no longterm advertising programme can be prepared. available opportunities. then our market share may decline. etc. So it is logical to decide advertisement budget on the basis of budgets of competitive concerns. 7) Ignores Other Important Variables/Factors affecting Advertising-Budget: In this method. Under such circumstances. So considering advertising expense as a dependent variable on sales is wrong. advertising budget is decided on the basis of sales only and other important factors affecting the advertising budget are ignored. sudden changes in marketing environment. Demerits of Competitive Parity Method 1) Wrong Assumption: This method is based on the assumption that competitors are always right and rational in making their ad-budget. All of these alternatives have one feature in common. Similarly the companies which are spending very less on advertising in comparison to their rival companies become alert about their meagre ad-budget. like-market needs. then company will appropriate very less amount for advertising but a new product needs heavy initial advertising expenditure to generate sales and to be popular. stage in product life-cycle.

Demerits of Objective and Task Method This method has some weaknesses. 1.. from their employees. This method is more suitable for long term planning. sales-level needs. i.e. it is better than affordable method. First of all.. So in this regard.3. Merits of Objective and Task Method 1) More Suitable in Case of New Products: In case of new product. so better co-ordination can be maintained among various advertising activities and tasks.” Objectives of advertising are long-term in nature. functions. The promotion-needs of these two brands are totally different. 3) Co-Ordination among Different Advertising Activities: In this method all advertising activities and tasks are decided in advance. it will have to compete with competitors’ already well established brands. etc. In this method advertising amount is not decided arbitrarily. According to this method.2) Non-Availability of Information: The Company using this approach needs information about rival’s- advertising-budgets. But the promotional needs are never same. In this method.. 4) Ignores other Variables affecting Ad Budget: This method considers only the advertising appropriation of rival companies. Tasks are like short-term goals. the whole budget will go wrong as objectives are the basis of this budget. Hence this method is goal oriented. 4) Logical: This method is more logical. Krick Patrick has defined ‘objective and task approach’ as “listing the advertising objectives and identifying the tasks to be done to achieve these objects. It is a goal-oriented method of appropriating the budget. Tasks are shortterm functions to be done to achieve these objectives. . So this method is more suitable for new products as it is based on zero base budgeting. So for preparing advertising budget in case of new products. It is based on setting advertising objectives and identifying the tasks to be performed to achieve these objectives. Then different tasks to be performed to achieve these objectives are identified. The new product will require heavier promotional efforts to create awareness among masses as compared to promotional needs of already well established brand. The management can only makes guess about rival’s ad-budget. the advertiser decides advertising budget as per the needs rather than linking budget with competitor’s budget or past sales.7. it needs no previous records.g. In this regard. there is no previous data on sales and no previous budget. when a company launches a new product. e. information. cost of all these tasks is estimated and total cost of all these tasks plus some amount for contingencies constitute advertising budget. all activities and tasks are enlisted to achieve advertising objectives. etc. It is a need based budget. 3) Different Promotion Needs: This method is based on wrong basic assumption that all firms in an industry have same opportunities for advertising and same promotional needs.1. After that. competitive parity method which considers only short term factors. where competitor’s actions are followed blindly. which are as follows: 1) Ill-Defined Objectives: If the objectives of advertising are not defined correctly. This method ignores the other important factors affecting advertising budget. etc. spying. advertising objectives are determined. But it is not an easy task to collect information about competitor’s ad-budget. This approach considers advertising as an investment and a means to achieve long-term business objective. The other important variables can be affordability. tasks required to be performed by the advertiser to achieve ad-objectives. it is better than competitive parity method. but such information may not always be reliable. Objective and Task Method The most desirable method of setting the advertising budget is objective and task method. The advertiser tries to get information about his competitor’s advertisement budget by indirect sources. 5) Suitable for Planning in the Long-Run: This method is based on both short term and long term advertising objectives. 2) Goal Oriented: This budget gives due consideration to advertising objectives. this method is more appropriate than other methods.

cost of various media. level of sales. advertising is also expected to give certain return. and for increased sales. 1. The return that the company gets from advertising is generally spread over a period of time. All you can Afford Here the advertising budget is established as a predetermined share of profits or financial resources. There may be change in marketing environment in comparison to last year like entry of new competitors. So it is also named as arbitrary method. Advertising builds up an intangible asset that is brand-equity.1. This asset has market value and can be sold at any stage.7. mistakes and weaknesses of last year’s budget are carried forward. So the company should increase its advertising budget over past year’s budget. So different tasks cannot be specifically defined. Brand equity refers to brand popularity and brand preference.2) Difficult to Determine Specific Tasks: It is difficult to translate objectives into specific tasks. advertising budget is decided by the experienced managers of the company on the basis of their judgment. But it is quite possible that cost may not be within affordable limit of organization. 1.4. nature of customers. 2) Repetition of Last Year’s Mistakes: This method simply adds a certain percentage to last year budget. more advertising expenditure will be required. On the whole. 4) Ignores Competitor’s Budget: This method does not give due consideration to competitor’s budget. Advertising expenditure in one year generates sales for years and thus returns on this investment flows in for many years. etc. This is a very simple method. Here advertising budget is based on arbitrary thinking of some experienced managers and not based on scientific lines. They decide the advertising budget at a lump sum figure considering all relevant factors like objectives of advertising. This method considers advertising expenditure as an investment and not as routine revenue expenditure. 1. Company may also expect increase in sales. So changed environment may necessitate preparation of entirely new budget. objective and task method is more rational. Any firm that limits its advertising outlays to the amount of available funds will probably miss opportunities for increasing sales and profits.7. Over the years. experience. While in practice. Increase in price level of advertising inputs leads to increase in advertising cost.7.1. Increase over Last Year’s Budget This method involves an increase in preceding year’s expenditure by a certain percentage to enable a firm to consider increase in advertising cost and to provide for planned growth in sales. availability of funds. change in government policy. the errors. realistic and need based as compared to other methods. But it has certain limitations: 1) Ignores Change in Marketing Environment and Objectives of Advertising: This method simply ignores the needs and objectives of advertising. from the standpoint of sound marketing practice. etc. 1. some managers gain experience and this enables them to arrive at appropriate figure for advertising budget by using their judgment.5. if the level of competition is very high. etc. This method involves no clerical or statistical work. The availability of current revenues sets the upper limit of the ad budget. then competitor’s budget cannot be ignored while framing our advertising budget. awareness. 3) Not Possible for New Product or in Case of New Company: This method cannot be used when a company launches new product or in case of a new company that has come into existence just in this year.1. Return on Investment Method Return on investment method is entirely different from other methods. actions and reactions of competitors.6. The only advantage to this approach is that it sets reasonable limits on the expenditures for advertising. It is based on the experience and judgment of experienced managers. knowledge. However. 3) Ignores Affordability: This method considers the cost of various tasks as the basis of budget. Like other investments of the company.1. Judgment Method In this method.7. this method is undesirable because there is no necessary connection between liquidity and advertising opportunity.7. Advertising results in increased profits generated by increase in sales . stage in product life cycle. Hence. Determining tasks requires adequate research.

Different advertising expenditure levels are kept for each market. Apparently. discounted cash flow. i. Using simulation. simulation or programming techniques...8. Because of its complexity it is not used in real life.e.. These methods assist the advertiser in deciding ad budget along with other methods of advertising. The managers may decide any level of budget depending on the firm’s advertising objectives. probability. According to this method company spends on advertising till return on investment is more than the normal rate of return.1. Quantitative Methods (Statistical Methods) Statistical techniques like multiple regression.1. it measures the cumulative effect of all the factors affecting advertising budget. Capital budgeting techniques like net present value.9. With the development of computers use of quantitative methods has increased. Experimental Approach Experimental approach is used as an alternative to the statistical approaches and mathematical models. This method correlates sales and profits with advertising expenditure. Results are compared and estimates can be developed on how budget variations might influence advertising results nationwide. This method considers long run effects of advertising. pay-back-method. level of brand usage and brand share. The feedback data from these experiments and tests is used in determining the advertising budget. Use of these methods is very tedious and only experts can make use of these methods. 1. during and after the test in each market. are used to appropriate the amount of advertising budget. It is based on very logical considerations but in practice it is very difficult to assess the returns from advertising.7. the experimental approach removes the difficulties faced by other budgeting methods. Probability is used to estimate the chances that a consumer will purchase the product if he is exposed to an ad copy.and goodwill. are used to prepare advertising budget. Brand awareness and sales levels are measured before. inter-relationship among various advertising activities and their effect on advertising budget is measured. 1. etc.7. Multiple regressions help to determine the effect of various factors on the size of advertising budget. . etc. The promotion or brand manager uses tests and experiments in one or more selected market areas. The purpose is to determine the impact of input variations that might be used. A brand may be simultaneously tested in several market areas with similar population.