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Advertising budget
 Advertising budget
• Advertising Budget is the amount of money
which can be or has to be spent on
advertising of the product to promote it, so
that advertising reaches the target
consumers so as to make the required sales
and give reasonable profits to the company
 Budget constraints
• Before finalizing the advertising budget of an
organization or a company, one has to take a
look on the favorable and unfavorable market
conditions which will have an impact on the
advertising budget. The market conditions to
watch out for are as follows:
• Frequency of the advertisement
• Competition and Clutter
• Market Share of the Product
• Product Life Cycle Stage
Advertising Budget Methods
 Top down approach

The company’s senior management prepares

the budget based on its objectives and then
passes it on to the managers for implementation.
Advertising activities are based on the budget
prepared by the management. It is a judgmental
approach Sometimes, the managers may put
forward suggestions for the budget before the
budget preparation, but whether their
contribution to the budgeting process will be
used or not is at the management’s discretion.
 Bottom up approach
Unlike in top-down budgeting, bottom-up
budgeting starts at the department level and moves up
to the top management. The departmental
heads/managers prepare their budget based on
present information and past experiences and present
it to the senior management for approval. They take
into account margin pressures and market conditions
to make the budget more realistic and attainable. The
budget presented to the top management contains an
explanation of each item indicated in the budget.
 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.
 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."
 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.
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.
 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
• In the unit-of-sales method you set aside a
fixed sum for each unit of product to be sold,
based on your experience and trade
knowledge of how much advertising it takes to
sell each unit
 HISTORICAL METHOD:

• In this method last year’s advertising budget is

adopted for the year with a view that
practically no change has taken place in the
market and market growth is slow, which does
not justify any addition to the budget. Last
year’s budget could be multiplied by a factor
to cover media rate increase.
 ARBITRARY ALLOCATION:

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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 build up
of the people in the management and not on
the market requirements.
 RETURN ON INVESTMENT (ROI)

• In the ROI budgeting method, advertising and

promotions are considered investments, like
plant and equipment. In other words investments
in advertisements lead to certain returns. Like
other aspects of the firm’s efforts, advertising and
promotion are expected to earn a certain return.
• To many the ROI method is an ideal method of
setting advertisement budget. But in reality it is
rarely possible to assess the returns provided by
the promotional effort-at least as long as sales
continue to be the basis for evaluation.
 INCREMENTAL CONCEPT APPROACH

• According to Managerial Economics a business

maximizes its profits beyond the point where the
incremental cost is equal to the incremental
revenue. Businessmen are fully aware that as
long as the cost of producing one extra unit is less
than the revenue generated by it, the business is
a profitable one. From managerial economics
viewpoint, this is the optimum advertisement
expenditure giving maximum profit. This is also
referred to as the concept of marginality.
 COMPOSITE METHOD

• This method takes in to consideration several

factors in formulating the advertising budget
which include indices like firm’s past sales,
future sales projection, production capacity,
market environment, sales problems,
efficiency level of sales personnel, seasonality
of the market, changing media scenario and
changing media impact on the target market
segment, market trends and results of
advertising and marketing.
Optimum budget for advertising