What are the four common methods used to set the total budget for advertising?

An advertising budget is an amount set aside by a company planned for the promotion of its goods and services. Promotional activities include conducting a market survey, getting advertisement creatives made and printed, promotion by way of print media, digital media, and social media, running ad campaigns, etc.

Table of contents

Advertising Budget Basis

The advertising budget of a company is based on the following factors:

• Type of advertising campaign that it intends to run
• Selection of target audience
• Type of advertising media
• Company’s objective of advertising

Process of Creating Advertising Budget

The following steps are followed to set up this budget –

• Setting advertising goals based on the company’s objectives.
• Determine the activities that are required to be done.
• Preparing the components of the advertising budget;
• Getting the budget approved by management;
• Allocation of funds for activities proposed under the advertisement plan;
• Periodically monitoring the expenses being incurred during the advertising process;

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Advertising Budget Methods

The most common methods are discussed as follows:

• Percentage of Sales: Under this method, the advertising budget is set as a percentage of either the past sale or expected future sales. Small businesses usually use this method.
• Competitive Parity: This method advocates that a company sets an advertising budget similar to the one set up by its competitor to yield similar results.
• Objective and Task: This method is based on the advertising objectives of this method. Once the objectives are decided, the cost is estimated to complete those objectives, and accordingly, a marketing budget is set.
• Market Share: In this method, the advertising budget is based on a company’s market share. For a higher market share, less marketing budget is set.
• All available Funds:  This is a very aggressive method under which all available profits are allocated towards advertising activities. This method can be used by start-up businesses that need advertisements to attract customers.
• Unit Sales: Under this method, the advertisement cost per article is calculated and based on the total number of articles, it is set.
• Affordable: As the name suggests, the company sets its budget based on how much it can afford.

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Factors Affecting Advertising Budget

• Existing Market Share: A company with a lower market share will be required to spend more on its promotional activities. On the other hand, companies with larger market shares can spend less on their promotional activities.
• The competition level in the industry: If there is a high competition level in the industry in which the company operates, the advertising budget would be required to be set on a higher side to get noticed by audiences. In case a monopoly exists or where there is the least level of competition involved, the company will need to invest less in marketing.
• Stage of the Product Life Cycle:  It is a well-known fact that in the initial introduction and growth stages of a product or service, more amounts would be required for advertising. While in the later stages of the product life cycleProduct Life CycleThe term "product life cycle" refers to the entire process that a product goes through from the time it is launched in the market until it is taken off the market and is divided into four stages: introduction, growth, maturity, and decline.read more, the need for advertising will decline.
• Decided frequency of Advertisement: The advertising budget will also depend on how frequently a company wants to run its ads. Frequent ads will call for a greater budget.

Strategies

Let us have a look at some strategies a company can follow.

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• Social Media Marketing: One can start by making profiles of the businesses on social media platforms like Facebook and Instagram, which can help reach out to larger audiences cost-effectively.
• Referral Benefits: In this strategy, you ask your customers to refer your business pages to their friends and family. This way, your customers do the marketing for you. You provide referral benefits and points when such referrals are buying the products.
• Content Marketing: Start a blog and update interesting content that attracts your audiences. This strategy, combined with other strategies, will benefit the business.
• Email Marketing: This strategy will depend on your database’s strength and relevance.
• Pay per click ad: In this strategy, you pay per ad you run on social media platforms. Based on your selected target audience, the ad is run and reaches the audience.

Advantages

Let us have a look at some advantages a company can follow.

• It helps to understand the advertising requirements and allocate the budget toward each necessary activity.
• The company’s overall advertisement expense remains monitored, ensuring that actual expense remains within a prescribed limit.
• When the budget is followed, it is ensured that the advertisement activities are done as per advertisement goals only, and no unnecessary expense is incurred.
• Each advertisement activity is kept under supervision and remains controlled well within budget.

Disadvantages

• An inaccurate budget can attract unnecessary costs since the target of the budget would not be met.
• It may be a costly affair for companies.
• Since advertising costs will also be ultimately recovered from the customers, the prices of the products will increase.

Importance of Advertising Budget

Ever wondered why companies spend so much on running advertisements? The company intends to attract audiences to its brand name through advertisement. Advertisement helps a company reach out to larger audiences and introduce them to its products and services. Because of this, the sales increase, which enables the company to earn more profits. It is important that before setting the advertising budget, the company’s objective is understood.

Conclusion

A company should set up its advertising budget after understanding and evaluating its advertising objectives and the need for advertising.

Recommended Articles

This article has been a guide to the Advertising Budget and its definition. Here we discuss the process of creating an advertising budget, its methods, and its advantages, disadvantages, and importance. You can learn more about it from the following articles –

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