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Advertising Budget Methods | Business Advertising Budget Example

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Methodes of Planning Your Advertising Budget

Small Business Advertising Budget - Deciding how much your advertising budget - just how much should be invested in making sales grow - and how that amount should be allocated is completely up to you, the business owner-manager.

Advertising costs are a completely controllable expense. Advertising budgets are the means of determining and controlling this expense and dividing it wisely among departments, lines, or services.

This Guide describes various methods (percentage of sales or profits, unit of sales, objective and task) for intelligently establishing an advertising budget and suggests ways of applying budget amounts to get the effects you want

If you want to build sales, it's almost certain you'll need to advertise. How should you allocate your advertising dollar? How can you be sure your advertising outlays aren't out of line? The advertising budget helps you determine how much you have to spend and helps establish the guidelines for how you're going to spend it.

What you'd like to invest in advertising and what you can afford are seldom the same. Spending too much is obviously an extravagance, but spending too little can be just as bad in terms of lost sales and diminished visibility. Costs must be tied to results. You must be prepared to evaluate your goals and assess your capabilities - a budget will help you do precisely this.

Your budget will help you choose and assess the amount of advertising and its timing. It will also serve as the background for next year's plan.

Methods of Establishing an Advertising Budget

Each of the various ways in which to establish an advertising budget has its problems as well as its benefits. No method is perfect for all types of businesses, nor for that matter is any combination of methods.

Here concepts from several traditional methods of budgeting have been combined into three basic methods:

(1) Percentage of sales or profits

(2) Unit of sales

(3) Objective and task

You'll need to use judgment and caution in settling on any method or methods.

Percentage of Sales or Profits

The most widely used method of establishing an advertising budget is to base it on a percentage of sales. Advertising is as much a business expense as, say, the cost of labor and, thus, should be related to the quantity of goods sold.

The percentage-of-sales method avoids some of the problems that result from using profits as a base. For instance, if profits in a period are low, it might not be the fault of sales or advertising. But if you stick with the same percentage figure, you'll automatically reduce your advertising allotment. There's no way around it: 2% of $10,000 is less than 2% of $15,000. Such a cut in the advertising budget, if profits are down for other reason, may very well lead to further losses in sales and profits. This in turn will lead to further reductions in advertising investment, and so on.

In the short run a business owner might make small additions to profit by cutting advertising expenses, but such a policy could lead to a long term deterioration of the bottom line. By using the percentage-of-sales method, you keep your advertising in a consistent relation to your sales volume - which is what your advertising should be primarily affecting. Gross margin, especially over the long run, should also show an increase, of course, if your advertising outlays are being properly applied.

What percentage?

You can guide your choice of a percentage-of-sales figure by finding out what other businesses in your line are doing. These percentages are fairly consistent within a given category of business.

It's fairly easy to find out this ratio of advertising expense to sales in your line. Check trade magazines and association. You can also find these percentages in Census and Internal Revenue Service reports and in reports published by financial institution such as Dun & Bradstreet, the Robert Morris Associates, and the Accounting Corporation of America.

Knowing what the ratio for your industry is will help to assure you that you will be spending proportionately as much or more than your competitors; but remember, these industry averages are not gospel. Your particular situation may dictate that you want to advertise more than or less than your competition. Average may not be good enough for you. You may want to out-advertise your competitors and be willing to cut into short term profits to do so. Growth takes investment.

No business owner should let any method bind him or her. It's helpful to use the percentage-of-sales method because it's quick and easy. It ensures that your advertising budget isn't way out of proportion for your business. It's a sound method for stable markets. But if you want to expand your market share, you'll probably need to use a larger percentage of sales than the industry average.

Which Sales? (Business Advertising Budget)

Your advertising budget can be determined as a percentage of past sales, of estimated future sales, or as a combination of the two:

1. Past Sales. Your base can be last year's sales or an average of a number of years in the immediate past. Consider, though, that changes in economic conditions can make your figure too high or too low.

2. Estimated future sales. You can calculate your advertising budget as a percentage of your anticipated sales for next year. The most common pitfall of this method is an optimistic assumption that your business will continue to grow. You must keep general business trends always in mind, especially if there's the chance of a slump, and hardheadedly assess the directions in your industry and your own operation.

3. Past sales and estimated future sales. The middle ground between an often conservative appraisal based on last year's sales and a usually too optimistic assessment of next year's is to combine both. It's a more realistic method during periods of changed economic conditions. It allows you to analyze trends and results thoughtfully and to predict with a little more assurance of accuracy.

Unit of Sales

In the unit-of-sale method you set aside a fixed sum for each unit of product to be sold, based on your experience and trade knowledge of how much advertising it takes to sell each unit. That is, if it takes two cents' worth of advertising to sell a case of canned vegetables and you want to move 100,000 cases, you'll probably plan to spend $2,000 on advertising them. Does it cost X dollars to sell a refrigerator? Then you'll probably have to budget 1,000 time X if you plan to sell a thousand refrigerators. You're simply basing your budget on unit of sale rather than dollar amounts of sales.

Some people consider this method just a variation of percentage-of-sales. Unit-of-sales does, however, probably let you make a closer estimate of what you should plan to spend for maximum effect, since it's based on what experience tells you it takes to sell an actual unit, rather than an overall percentage of your gross sales estimate.

The unit-of-sales method is particularly useful in fields where the amount of product available is limited by outside factors, such as the weather's effect on crops. If that's the situation for your business, you first estimate how many units or cases will be available to you. Then, you advertise only as much as experience tells you it takes to sell them. Thus, if you have a pretty good idea ahead of time how many units will be available, you should have minimal waste in your advertising costs.

This method is also suited for specialty goods, such as washing machines and automobiles; however, it's difficult to apply when you have many different kinds of products to advertise and must divide your advertising among these products. The unit-of-sales method is not very useful in sporadic or irregular markets or for style merchandise.

Objective and Task

The most difficult (and least used) method for determining an advertising budget is the objective-and-task approach. Yet, it's the most accurate and best accomplishes what all budgets should:

  • It relates the appropriation to the marketing task to be accomplished.

  • It relates the advertising appropriation under usual conditions and in the long run to the volume of sales, so that profits and reserves will not be drained.

To establish your budget by this method, you need a coordinated marketing program with specific objectives based on a thorough survey of your markets and their potential.

While the percentage-of-sales or profits method first determines how much you'll spend without much consideration of what you want to accomplish, the task method establishes what you must do in order to meet your objectives. Only then do you calculate its cost.

You should set specific objectives: not just "Increase sales," but, for example, "Sell 25% more of product X or service Y by attracting the business of teenagers." Then determine what media best reaches your target market and estimate how much it will cost to run the number and types of advertisement you think it'll take to get that sales increase. You repeat this process for each of your objectives. When you total these costs, you have your projected budget.

Of course, you may find that you can't afford to advertise as you'd like to. It's a good idea, therefore, to rank your objectives. As with the other methods, be prepared to change your plan to reflect reality and to fit the resources you have available.

How to Allocate Your Advertising Budget

Once you have determined your advertising budget, you must decide how you'll allocate your advertising dollars. First, you'll have to decide if you'll do any institutional advertising or only promotional advertising.

After you set aside an amount to build your image (if that's your plans for the year), you can then allocate your promotional advertising in a number of ways. Among the most common breakdowns are by:

1) departmental budgets

2) total budget

3) calendar periods

4) media

5) sales areas

Departmental Budgets

The most common method of allocating advertising dollars is percent of sales. Those departments or product categories with the greatest sales volume receive the biggest share of the budget.

In a small business or when the merchandise range is limited, the same percentage can be used throughout. Otherwise, a good rule is to use the average industry figure for each product.

By breaking down the budget by departments or products those goods that require more promotion to stimulate sales can get the required advertising dollars. Your budget can be further divided into individual merchandise lines.

Total Budget

Your total budget may be the result of integrated departmental or product budgets. If your business has set an upper limit for advertising expense percentage, then your departmental budgets, which are based on different percentages of sales in each area, might be pared down.

In smaller business the total budget may be the only one established. it too, should be divided into merchandise classification for scheduling.

Calendar Periods

Most executives of small businesses usually plan their advertising on a monthly, even a weekly, basis. Your budget, even if it's for a longer planning period, ought to be calculated for these shorter periods. It will give you better control.

The percentage-of-sales methods is also useful here to determine how much money to allocate by time periods. The standard practice is to match sales with advertising dollars. Thus, if February accounts for 5% of your sales, you might give it 5% of your budget.

Sometimes you might want to adjust advertising allocations downward in some of your heavier sales months, so you can boost the budget of some of your poorer periods. But this should be done only if you have reason (as when your competition's sales trends differ markedly from yours) to believe that a change in your advertising timing could improve slow sales.

Media

The amount of advertising that you place in each advertising medium - such as direct mail, newspapers, or radio - should be determined by past experience, industry practice, and ideas from media specialists. Normally it's wise to use the same sort of media your competitors use. That's where, most likely, your potential customers look and listen.

Sales areas

You can spend your advertising dollars where your customers already come from, or you can use them to try to stimulate new sales areas. Just as in dividing your appropriation by time periods, it's wise to continue to do the bulk of your advertising in familiar areas. Usually it's more costly to develop new markets than to maintain established ones.

A Flexible Advertising Budget

Any combination of these methods may be employed in the formation and allocation of your advertising budget. All of them - or simply one - may be needed to meet your advertising objectives. However you decide to plan your budget, you must make it flexible, capable of being adjusted to changes in the marketplace.

The duration of your planning and budgeting period depends upon the nature of your business. If you can use short budgeting periods, you'll find that your advertising can be more flexible and that you can change tactics to meet immediate trends.

To ensure advertising flexibility, you should have a contingency fund to deal with special circumstances - such as the introduction of a new product, specials available in local media, or unexpected competitive situations.

Beware of your competitor's activities at all times. Don't blindly copy your competitors, but analyze how their actions may affect your business - and be prepared to act.

Getting Started

Your first budget will be the most difficult to develop - but it will be worth the effort. The budget will help you analyze the results of your advertising. By your next business year you'll have a more factual basis for budgeting than you did before. Your plans will become more effective with each budget you develop.

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