Advertising is one of the variables which affect sales and hence the profit earned. It is therefore difficult to calculate the amount to be allocated for advertisement budget. Also the budgeting depends on various other factors like:
Degree of competitiveness in market: Monopoly/Duopoly/Oligopoly
A monopoly firm does not have to worry about the promotional spends as it is the only player in the market. For duopoly, where market is dominated by two dominant players, the promotional budgets would be high to outperform each other. In an Oligopolistic market, where the market is cluttered and there are many players, promotional spends has to be higher as the frequency of advertisements has to be increased to get noticed among so many players.
Market Share: Market leader/Market Follower
The advertisement budget for a market follower will be decided by the tactics of the market leader. To improve market share one of the investment is to increase promotional spent.
The advertisement budget would be higher at the introduction and growth stages as it has to introduce the product in the market and establish itself among the competitors so the frequency of advertisements would be high and so would be the budget. As the product reaches maturity and decline stages the promotional spent would be lower.
There are various approaches which businesses use to calculate their advertisement budget:
Percentage of Sales
In this method the advertisement budget is calculated as certain fixed percentage of the sales or estimated sales.
Comparison with Competitor
In this method the advertisement budget is estimated based on competitors promotional spending. Either equal, more or less depending on the objectives of the company.
What I can afford
In this method the advertisement budget is decided based on availability of funds. Mostly for small companies the funds available varies from time to time based of business performance. Hence marketing spend vary throughout the year based on availability of funds.
Goal and Task
If the organization has well defined objectives or goals it can use this method of allocating advertisement spending. The tasks associated with the goals are evaluated and cost calculations are done. Based on the cost estimates funds are allocated.
In this method, seasoned managers take decisions of allocating budget for advertisements based on their experience and intuition.
All available funds
In this, the organization is focussed heavily on advertising and it allocates all available funds for promotional activities. This approach might get the organization noticed but on the other hand lack of funds stunts growth.