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An Advertising Budget refers to the amount of money allocated towards advertising of a We don't spam. We Educate.
brand or product.

While developing an advertising strategy, it is empirical to set advertising objectives

which are significantly influenced by the advertising budget. Advertising objectives are
important for decision making and to have a point of reference or standard against which
the results can be measured. A business may choose a sales objectives or
communication objectives for the purpose of developing an advertising budget.

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9/25/2020 Advertising Budget - Objectives, Approaches, Methods - BBA|mantra

(i) Sales Objectives – The objective is to increase the sale of products or to compliment
the selling efforts of the sales department. The objective may be changed from time to CHOOSE YOUR SUBJECT
time depending upon the volume of sales which may be influenced by –
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(ii) Communication objective – The objective is to create awareness, develop interest Computer Applications (9)
or to change an attitude. For this purpose a business may choose to – Consumer Behaviour (22)
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Basis of Advertising Budget Income Tax (2)

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The various factors that have to be studied before setting the advertising budget are – Investment Analysis & Portfolio Management (11)
IT & Technical Skills (5)
Market size and Potential Macro-Economics (9)
Product life cycle stage Management Accounting (18)
Market share Management Information System (4)
Intensity of competition Managerial Economics (2)

Advertising frequency Marketing & Advertising (7)

Product differentiation strategies Marketing Management (18)

Marketing of Services (6)
Many businesses consider advertising as an expense rather than an investment, hence it Micro-Economics (2)
is important to use a theoretical basis and budget allocation methods to make an Operations Management (2)
effective advertising budget. Organizational Behaviour (7)
Personal Finance (2)
The Theoretical basis for creating an advertising budget is Economic Marginal Principles of Management (9)
Analysis. According to Economic Marginal Analysis a firm should continue to increase Project Management (11)
its advertising budget for a particular brand or for a certain target market as long as the Projects and Presentations (33)

(MR) Marginal Revenue exceeds the Incremental Expenditure (IE). However this basis Public Finance (11)

takes into account the two assumptions which are: Research Methodology (9)
Rural Marketing (1)
Strategic Management (14)
Advertising is solely responsible for sale
Sales are a direct result of advertising and the deviation can be measured accurately

Due to these assumptions this model is rarely used as it is not practical to that assume RECENT POSTS

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Most advertiser support one of two models of advertising to sales response function
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9/25/2020 Advertising Budget - Objectives, Approaches, Methods - BBA|mantra
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Concave downward function curve – As the amount of advertising increases it Norms
incremental value decreases following the law of diminishing marginal utility i.e. June 21, 2020

advertising effects start diminishing quickly. Hence less advertising money may needed
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for optimum sales.
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S-shaped function curve – Initial expenditure on advertising has a very little effect on
sales. After a certain point increment in advertising expenditure lead to increased sales
but the gain in sales continue only up to a point and after that there is no effect on
increased expenditure on sales. Hence it suggests that less budget has a minimal impact
and a high budget may not necessarily have a high impact.

Advertisers must advertise and spend in the area of rising curves where maximum return
on advertising expenditure can be accomplished.

Approaches to Advertising Budget

Approaches to Advertising Budget

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Top Down Approach Build Up Approach

Top management sets the spending limit
Advertising budget is set within the
allocation limits.
Advertising objectives and activities are
planned according to the set budget.
It is a Judgmental Approach
Budget is not linked to the objectives.
This leads to predetermined budget
allocations which are not related to
advertising objectives.
Methods – Affordable Method, Arbitrary
Allocation, Percentage of Sales,
Competitive parity, Return on investment
Advertising objectives are set
Activities necessary to achieve objectives
are planned
Costs of different advertising elements
are budgeted.
Total advertising budget is approved by
top management
Budget is allocated on the basis of
activities considered essential to
accomplish the objectives.
Methods – Objective and Task Method,
Payout Planning, Quantitative Approach,
Experimental Approach

Methods of Advertising Budget

(i) The affordable method – All you can afford –

It is a simple method
Whatever is left out of the financial budget is allocated to advertising
After making all business expenditures the amount left is allocated to advertising
No consideration is given to advertising objectives or goals
Chances of over or under spending are high
A common method in small firms or firms with primary focus on new product
development

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(ii) Arbitrary Allocation Method –

There is no theoretical basis of creating a budget

Budget is allocated on the basis of what is felt necessary by decision makers
It lacks systematic thinking
There is no relationship with advertising objectives
Managers believe that some amount must be spent on advertising and pick up a figure

(iii) Percentage of sales method –

It is a commonly used method by large and medium sized companies

Budget allocated depends upon the total sales figure i.e. high sales = high budget, low
sales = low budget
The basis of budget allocation is the total sale of brand or product. It may be:
A fixed percentage of last year’s sales figure is allocated as the budget.
A fixed percentage of projected sales figures of the next year
A fixed amount of the unit product cost is taken as advertising expense and multiplied
by the number of projected sales unit.

Advantages

It is simple, straight forward, easy to implement

Expenditures are directly related to funds available.

Disadvantages

It ignores that less advertising may decline sales or potential of advertising in rising
sales
It can lead to over or under spending
It is difficult to predict sales for new products
Decrease in sales leads to decrease in advertising budget which may be needed

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(iv) Competitive parity method –

Budget is based on competitors expenditure, advertisers decide budget matching

competition’s % of sales allocation
Information of competitor`s budget is available in trade journal and business magazine
The basis is that collective wisdom of many firms may generate an advertising budget
optimum or close to optimum
It leads to competitive stability
It minimizes chances of promotional wars

Disadvantages

Each firm allocates budget according to its own specific goals

It ignores the contribution of media and creative executions
Information is gathered when money is spent

(v) Objective and Task method

In this method the selling objectives and budget decision are linked and considered
simultaneously. It involves –

Defining the advertising communication objectives to be accomplished

Deciding specific strategies and tasks necessary to achieve them
Estimating the costs involved in putting these activities in operation
The total of these costs is taken as the base to determine the advertising budget.

Advantages

The method develops budget from ground up which is a proper managerial approach
It does not rely on past sales or future sale forecasts
It considers all factors under advertiser’s control

Disadvantages

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It is difficult to implement
It requires managerial involvement and high skills
It attempts to introduce variables such as awareness, knowledge, attitude formation
etc.
It is difficult to estimate all costs and determine all tasks necessary to achieve the set
objectives

(vi) Pay out planning

It is useful when introducing a new product

The aim is to spend heavily to achieve increased awareness and product acceptance
It estimates the investment value of advertising by linking it to other budgeting methods
The idea is to predict the amount of revenue the product will generate and the costs it
will incur over a period of time
The advertising budget is determined on the basis of rate of return desired
Preparing a payout plan depends upon accuracy of sales forecast, factors affecting
market, estimated costs
Initially the advertising expenditures will be high and eventually will reach a break-even
point and then will show decline and increase in sales following the S shaped Function

Advantages

It is useful and logical planning tool

Disadvantages

It cannot account for uncontrolled factors e.g. – competition, changes in government

policies, new technology

(vii) Quantitative Models

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Advertisers use quantitative methods such as mathematical and statistical models to

allocate advertising budget
Multiple regression analysis is used to determine the effect of advertising expenditure
on sales.
Experimentation and formal analysis is required to use this method
It is an expensive and time consuming method

(viii) The Experimental approach –

It is an alternative to quantitative models

The Advertising manager conducts tests or experiments in one or more selected
market areas
The Advertising strategy is tested in market areas with similar population, brand usage,
market share
Different advertising expenditure levels are kept for each market
Brand awareness and sales levels are measured before and after
Results are compared and variation of influence of advertising expenditure studied
The feedback results determine the advertising budget levels
Manager may decide a certain budget level according to the advertising objectives

Disadvantages

It is expensive and time consuming

It ignores uncontrollable factors
It not universally accepted

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