In practice, the following approaches are used for setting the advertising budget:
Approaches to setting the advertising budget
Method (1) Fixed percentage of sales
In markets with a stable, predictable sales pattern, some companies set their advertising spend consistently at a fixed percentage of sales. This policy has the advantage of avoiding an “advertising war” which could be bad news for profits.
However, there are some disadvantages with this approach. This approach assumes that sales are directly related to advertising. Clearly this will not entirely be the case, since other elements of the promotional mix will also affect sales. If the rule is applied when sales are declining, the result will be a reduction in advertising just when greater sales promotion is required!
Method (2) Same level as competitors
This approach has widespread use when products are well-established with predictable sales patterns. It is based on the assumption that there is an “industry average” spend that works well for all major players in a market.
A major problem with this approach (in addition to the disadvantages set out for the example above) is that it encourages businesses to ignore the effectiveness of their advertising spend – it makes them “lazy”. It could also prevent a business with competitive advantages from increasing market share by spending more than average.
Method (3) Task
The task approach involves setting marketing objectives based on the “tasks” that the advertising has to complete.
These tasks could be financial in nature (e.g. achieve a certain increase in sales, profits) or related to the marketing activity that is generated by the campaigns. For example:
• Numbers of enquiries received quoting the source code on the advertisement
• Increase in customer recognition / awareness of the product or brand (which can be measured)
• Number of viewers, listeners or readers reached by the campaign
Method (4) Residual
The residual approach, which is perhaps the worst of all, is to base the advertising budget on what the business can afford – after all other expenditure. There is no attempt to associate marketing objectives with levels of advertising. In a good year large amounts of money could be wasted; in a bad year, the low advertising budget could guarantee a further low year for sales.