An advertising budget is an estimate of a company’s promotional expenditures over a certain time period. More importantly, it is the money a company is willing to set aside to accomplish its marketing objectives. When creating an advertising budget, a company must weigh the value of spending an advertising dollar against the value of that dollar as recognized revenue.
An advertising budget is part of a company’s overall sales or marketing budget that can be viewed as an investment in a company’s growth. The best advertising budgets—and campaigns—focus on customers’ needs and solving their problems, not company problems such as an overstock reduction.
Advertising Budget and Goals
Before deciding on a specific advertising budget, companies should make certain determinations to ensure that the budget is in line with their promotional and marketing goals:
- Target consumer: Knowing the consumer and having their demographic profile can help guide advertising spend.
- Type of media that is best for the target consumer: Mobile or internet advertising—via social media—may be the answer, although traditional media, such as print, television, and radio may be best for a given product, market, or target consumer.
- Right approach for the target consumer: Depending on the product or service, consider if appealing to the consumer’s emotions or intelligence is a suitable strategy.
- Expected profit from each dollar of advertising spend: This may be the most important question to answer, as well as the most difficult.
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.
Factors Affecting Advertising Budget
Advertising is one of the variables which affect sales and hence the profit earned. It is therefore difficult to calculate the amount to be allocated for advertisement budget. Also the budgeting depends on various other factors like:
- Degree of competitiveness in market: Monopoly/Duopoly/Oligopoly
A monopoly firm does not have to worry about the promotional spends as it is the only player in the market. For duopoly, where market is dominated by two dominant players, the promotional budgets would be high to outperform each other. In an Oligopolistic market, where the market is cluttered and there are many players, promotional spends has to be higher as the frequency of advertisements has to be increased to get noticed among so many players. Thus depending upon the competition the advertising budget is set.
- Market Share: Market leader/Market Follower
The advertising budget for a market follower will be decided by the tactics of the market leader. To improve market share one of the investment is to increase promotional spent. Thus, where a company stands is a deciding factor in advertising budget
- Product life-cycle stage: Introduction/growth/maturity/decline
The advertisement budget would be higher at the introduction and growth stages as it has to introduce the product in the market and establish itself among the competitors so the frequency of advertisements would be high and so would be the budget. As the product reaches maturity and decline stages the promotional spent would be lower.
- Advertising Frequency
An ad can be played only once or can be be multiple times. Also, it can be daily, weekly, fortnightly, monthly etc. Depending upon the requirement, the advertising budget is altered.
Advertising Budget Process
There are certain steps which can be followed in creating an advertising budget. They can be explained as below:
- Understanding advertising objectives based on the goals which have been set by the company.
- Determine the tasks, ad campaigns which could be done.
- Formulating, evaluating and preparing the breakup of advertising budget.
- Taking approvals form the senior management.
- Allocation of funds for different activities under the advertising budget.
- Monitoring and controlling the expenditure and revising it for better profit.