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Advertising Budget – Objectives, Approaches, Methods

bbamantra 12 months ago
 Direct action advertising

(ii) Communication objective – The objective is to create awareness,

develop interest or to change an attitude. For this purpose a business may
choose to –  

Increase the % of target customers who associate a special feature or

bene t with company’s brand
Increase number of customers who prefer company’s brand over
competing brands
Increase company’s brand usage among existing members
Encouraging a brand trial among targeted customers

Basis of Advertising Budget

The various factors that have to be studied before setting the advertising
budget are –

Market size and Potential

Product life cycle stage
Market share
Intensity of competition
Advertising frequency
Product di erentiation strategies

Many businesses consider advertising as an expense rather than an

investment, hence it is important to use a theoretical basis and budget
allocation methods to make an e ective advertising budget.

The Theoretical basis for creating an advertising budget is Economic

Marginal Analysis. According to Economic Marginal Analysis a rm should
continue to increase its advertising budget for a particular brand or for a
certain target market as long as the (MR) Marginal Revenue exceeds the
Incremental Expenditure (IE). However this basis takes into account the two
assumptions which are:

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 advertising alone determine sales as there are many other
environmental factors that a ect sales.

Most advertiser support one of two models of advertising to sales response

function namely the Concave downward function or the S-shaped function.

Picture Credits: Advertising and Sales Promotion – S.H.Kazmi, Satish.K.Batra

Concave downward function curve – As the amount of advertising increases

it incremental value decreases following the law of diminishing marginal
utility i.e. advertising e ects start diminishing quickly. Hence less
advertising money may needed for optimum sales.

S-shaped function curve – Initial expenditure on advertising has a very little

e ect 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 e ect 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

Top Down Approach Build Up Approach

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

Methods of Advertising Budget

(i) The a ordable method – All you can a ord –

 It is a simple method
Whatever is left out of the nancial 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 rms or rms with primary focus on new
product development

(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 gure

(iii) Percentage of sales method –

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

Budget allocated depends upon the total sales gure 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 xed percentage of last year’s sales gure is allocated as the budget.
A xed percentage of projected sales gures of the next year
A xed 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 di cult to predict sales for new products
Decrease in sales leads to decrease in advertising budget which may be
needed

(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 rms may generate an
advertising budget optimum or close to optimum
It leads to competitive stability
It minimizes chances of promotional wars

Disadvantages

Each rm allocates budget according to its own speci c 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 –

De ning the advertising communication objectives to be accomplished

Deciding speci c 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

It is di cult to implement
It requires managerial involvement and high skills
It attempts to introduce variables such as awareness, knowledge, attitude
formation etc.
It is di cult 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
a ecting 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

Advertisers use quantitative methods such as mathematical and statistical

models to allocate advertising budget
Multiple regression analysis is used to determine the e ect 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
Di erent advertising expenditure levels are kept for each market
Brand awareness and sales levels are measured before and after
Results are compared and variation of in uence 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

Categories: Advertising Management, Articles

Tags: Advertising Budget Objectives, Affordable Method, Approaches to Advertising Budget, Arbitrary Allocation,
Basis of Advertising Budget, Competitive parity, Experimental Approach, Methods of Advertising Budget, Objective
and Task Method, Payout Planning, Percentage of Sales, Quantitative Approach, Return on investment

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