Advertising Budgets are need based for individual companies and there are no hard and fast rules for any particular type of company even with high profitability or very popular branded products. We shall now describe some general guidelines in the paragraphs given below which are currently followed by firms.
Once the goals have been set, the advertiser has to decide on the budget. How much should a firm spend on advertising its brand or services? Most firms have their own norms, but there appears to be some common guidelines that influence budget decisions.
Percent of Sales
One of the most common methods in advertising budgeting exercise is percentage of sales. Past sales or projected future sales is used as the base. For example, a firm may spend 2% of its sales on advertising its brands. If this firmâ€™s sales turnover for the last year 2003-04 was Rs 100 cr, then it would have spent Rs 200 lacs on advertising its products and services. Now if the same firm anticipates a sales turnover of Rs 200 cr in 2005-06, then its advertising budget will be more not necessarily prorata but say about
Rs 400 lacs. Percentage of sales method is the most popular approach to budgeting in advertising.
This method on guidelines to budgeting provides comfort to finance oriented executives who believe that advertising should be resorted to only if the firm can afford it. Further more this method helps prevent advertising wars within the industry as firms follow this rule of budgeting.
The limitation of this method is that it does not believe that advertising can influence sales. In fact, here sales or estimates of sales seem to influence advertising expenditure. Imagine the impact of this method on brands that are market leaders and enjoy high customer loyalty and brands which have just been introduced. What will happen is that while the former will have a liberal advertising budget (they are large sellers), often not required, the latter may not receive adequate budget and consequently suffer in the long run.
Hence, the percent of sales method needs to be revised to respond to market dynamics where a brand may have to be strengthened or maintained or built.
Another approach to ad budgeting is affordability. In this method, the firm first allocates its financial resources to other unavoidable heads like manufacturing, R&D, trade discounts, etc. and then whatever is left is allocated to advertising. By doing so, the decision maker ensures that there is no excessive advertising or that resources are not being wasted. Once again this method satisfies finance oriented executives and also assumes that sales are independent of advertising.
The third approach to advertising budgeting process is to maintain competitive parity with identical firms. The logic is that collective wisdom is better than an individual firmâ€™s ideas or a brand managerâ€™s beliefs. This will lead to a near optimal ad budget. Further, this method ensures that advertising wars do not occur in the industry.
The limitation of this approach is that there is no guarantee that everyone will operate at the optimal level of spending. Even if it is so, a firm may effectively and more productively utilize the money it is spending on advertising by a better media plan and a more creative ad copy than others. The difference in revenues of firms does not support this principle.
Objectives and Tasks
This is a more proactive approach than the ones outlined above. In this method, as the name suggest, an advertising objective is determined in specific terms. Subsequently, tasks are identified that will help achieve this objective. Finally, the decision maker estimates costs of each of these tasks and the total of all these costs now become the advertising budget.
This method is logical as it assumes a causal flow from advertising.
Ad budgets have to be responsive to market conditions and hence old thumb rules which have been cost and finance oriented cannot help the firm in getting most out of their ad campaigns. More and more firms are now accepting this fact and moving towards the objective and task method. Now a days the budgets and copy of advertising is kept confidential and released giving a surprise to competitors and also with the sole intention of they not grabbing the idea. Amul and Pepsi can be categorized as a few of such firms.