The advertising budget, or the total amount of money a firm allocates to advertising activities for a specific time period, is difficult to determine because the effects of advertising are difficult to measure. There are many factors that can determine a firm’s decision about the appropriate level to fund advertising activities, including the geographic size of the market, the distribution or density of customers, the types of products advertised, sales volume relative to the competition, and the firm’s own historical advertising budget. Usually, the advertising budget for business products is small compared to consumer convenience products such as cigarettes, soft drinks, detergents, and cosmetics. There are several different ways to determine an appropriate advertising budget:
1. Percentage of Sales Approach- This approach is the most widely used method for determining the advertising budget. The approach is simple, straightforward, and based on what the firm traditionally spends on advertising. The obvious flaw of this approach is its implied assumption that sales create advertising. Also, during periods of declining sales, setting the budget as a percentage of sales may be a mistake because reduced advertising is often not the best strategy.
2. Objectives and Task Approach- This approach requires that the firm lay out its goals for the advertising campaign and then list the tasks required to accomplish specific advertising objectives. The firm calculates and sums the costs of each task to determine the total budget. The major drawback of this approach is that the level of effort needed to accomplish advertising objectives is difficult to know with certainty.
3. Competitive Matching Approach- This approach involves firms attempting to match major competitor’s advertising expenditures in absolute dollars. Many firms review competitive advertising and compare competitor’s expenditures across various media in relation to their own spending levels. This competitive tracking can occur at the national and regional levels and at least can provide a benchmark for comparing advertising resources to market share movements. The problem with competitive matching is that all firms are different, so competitors are likely to have different advertising objectives and different resources to devote to advertising.
4. Arbitrary Approach- Intuition and personal experience set the advertising budget under this approach. The arbitrary approach can lead to mistakes in budgeting because it is not necessarily scientific, objective, or logical. On the other hand, deciding how much to spend on advertising is not an exact science.
Determining the appropriate advertising budget is an important part of any marketing strategy. Setting the budget too high will obviously result in overspending, waste, and lower profits. However, setting the budget too low may be even worse. Firms that do not spend enough on advertising find it very difficult to stand out in an extremely crowded market for customer attention.