Advertising budget | How to establish baseline budget

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How do a company determine advertising budget?

One of the important ingredients of advertising policy is the determination of the advertising budget. The company’s ability to finance an advertising programme depends partly on the potency of the advertisement to generate the desired level of sales and partly on the availability of funds in the desired quantum. If a company does not have adequate funds to support its advertising campaign, it should concentrate on other promotional ideas.

But when a company intends to embark on an advertising programme, it finds that it is not easy to establish the advertising budget. One of the widely used methods of determination of the advertising budget process is to earmark a certain percentage of sales for it, though there is no direct relationship between sales and advertisement because the use of other promotional tools, the competitor’s actions and strategy and environmental factors — all these influence sales.

There is another problem, too; and that is that the buyers who have developed a favorable attitude to the product following advertising methods during a year may buy it in the ensuring year as well. Also, there is no guarantee that increased advertising expenditure will result in higher sales; it is not infrequent that the money spent on advertising fails to yield the desired results because of the poor message design or ineffective media scheduling. But in spite of all these difficulties, it is desirable for the management to determine the advertising budget of company.

How to establish Base-Line Budget in advertising?

Those companies which desire to launch a large-scale advertising programme should establish a base-line budget. The various methods of establishing baseline budget for advertising are as follows:

1. Percentage-of-sale Method: Under this method, a certain percentage of sales is earmarked for the budget. This percentage may be determined either on the basis of gross sales, or on the net sales volume for the preceding year, or on the average sales volume for a period of years. In addition to it, an estimate of future sales may be combined with the average. Some are of the opinion that this makes for greater accuracy in determining the amount to be spent on advertising.

2. Unit-of sale Method: This method requires that a fixed sum per unit of product sold will be set aside as an appropriation for advertising. This method is very satisfactory, particularly when it is used in advertising a commodity which is produced in uncertain quantities. The manufacturers of such products as washing machines, automobiles, and domestic oil-boomers are in a position to use the unit-of-sale method to good advantage. But it is the least satisfactory method for fashion products, or when market conditions are uncertain.

3. Objective-and-task Method: This method involves the consideration of such problems as goodwill, market development, aids to dealers, or the accomplishment of any other purpose desired by the proper officials. The objectives-and-task method allows a great deal of initiative to the advertiser, makes it possible for him to do some thinking for himself, to be free from the domination of his competitor, and to make use of any facts and figures which may have been gathered and furnished to him at considerable expense.

Advertisers sometimes sell direct to the consumers whose orders and inquiries they receive as a result of direct-mail solicitations or of advertising copy inserted in widely-read periodicals. With a given advertisement or series of advertisements, consumers are induced to make direct purchases. There is, then, a direct relationship between the cost of this sales stimulus and the results obtained. While this cost is not constant, the advertiser can, over a period of time, find upper and lower limits between which he may expect to find his selling cost. He can then appropriate for advertising a sum of money set by the cost per sales by usually taking the upper figure. And since this cost per sale is not constant, he must continually test it and keep careful and minute records of advertising response.