Advertising is one of the most visible forms of communication. It is often the most important part of the communications mix, especially for consumer goods. Therefore, advertising budget decisions are critical. Choosing the promotional budget can be a tough process, so study the available methods carefully!
Every advertisement campaign involves advertising budget decisions. How much can it cost, and how should the promotional budget be allocated across markets and over time? Several methods for making proper advertising budget decisions exist. Remember: the advertising budget decisions cannot be regarded in isolation. They have to be seen as one element of the overall marketing mix.
Approaches and Methods for Advertising Budget Decisions
The most basic approach to decide on the promotional budget is the affordable approach. It means that advertising budget decisions are led by what the firm can afford. Thus, they are based on what the company, or the marketing department, believe the firm can afford to spend on advertising. Consequently, such advertising budget decisions are not based on any clear objective. Problems result, since the firm may spend too little or too high amounts on advertising in relation to its true needs.
Percentage of Sales Approach
Under the percentage of sales approach, the company will automatically allocate a fixed percentage of sales to the advertising budget. Therefore, these advertising budget decisions link the promotional budget directly to a measure of profit.
This method involves several advantages:
- For firms selling in many countries, this simple method can guarantee equality among the markets. Each market gets the advertising it deserves.
- The promotional budget can be justified easily in budget meetings, as it is objective.
- It guarantees that the company only spends on advertising as much as it can afford. The firm can decide on the margin it can spend on advertising.
However, also some disadvantages exist:
- The method uses historical performance rather than future performance to decide on the percentage of sales allocated to advertising.
- The possibility that extra spending on advertising may be necessary when sales are declining is neglected. The sales trend can thus not be reversed by reboosting the product life cycle curve with advertising.
- The firm’s marketing goals across countries (which may differ) are not taken into account.
- Local management is encouraged to maximize sales by using the easiest and most flexible marketing tool: the price. Lowering the price only to increase sales may be harmful.
- The method’s simplicity encourages management not to pay real attention to the relationships between advertising and sales or the overall effectiveness of advertising campaigns.
- This approach to advertising budget decisions is unsuitable for launching new products or entering new markets (zero sales = zero advertising).
Competitive Parity Approach
The competitive parity approach involves an assessment of competitors’ promotional budgets. It means estimating and duplicating the amounts spent on advertising by major rivals. However, determining the marketing expenditures of competitors, especially of foreign-based competitors, is rather difficult. Financial accounts may not be open to public inspection, and their promotional activities are not always immediately obvious the moment they occur. Most important, however, is the fact that blindly following competitors’ budgets means blindly trusting in their competence. Competitors are not necessarily right!
In addition, the competitive parity approach to advertising budget decisions does not recognize that the company is in different situations in different markets. If the firm is new to a market, its relationships with customer are different from those of already existing and established competitors. This difference should be reflected in the promotional budget.
Objective and Task Approach
The final (and maybe best) approach to advertising budget decisions is the objective and task approach. The weaknesses of the above approaches for deciding on the promotional budget has led many firms to follow this method. The objective and task approach involves determining the advertising objectives first and then ascertaining the tasks needed to attain these objectives. This method does therefore exactly meet the needs of the specific situation, time, product and market.
The objective and task approach also includes a cost-benefit analysis. In this analysis, objectives are related to the costs of achieving them. Only when the total benefits are greater than the costs of achieving them, the advertising budget decisions are right.
Of course, good knowledge of the local market is needed to use the objective and task approach efficiently. Objectives should be established in the most precise manner possible, being quantitative, measurable, realistic but challenging, understandable and justifiable, and congruent among the firm’s markets, products and divisions.