Advertising Budget - Meaning, Importance & Factors

Published in Marketing and Strategy Terms by MBA Skool Team

What is Advertising Budget?

Advertising budget is the amount allocated by a company for its promotional activities in forms of advertising campaigns. Advertising budget is used by a company for marketing the products and services to the customers. It includes money for doing advertising research, getting creatives made, printing material, allocating money to advertising media and ensuring proper implementation of ad campaigns.

Importance of advertising budget

The objective of a company which markets its products is to earn profits and increase brand awareness. Advertising objectives of a company is purely dependent on the advertising campaign, type of customers, advertising media and what the company wants to achieve. Hence, for any marketing activity that a company wants to do, it has to spend some money. This is why advertising budget is important.

It helps in understanding the objectives. the costs, helps to formulate strategies and generate profits by increasing the overall sales.

Factors affecting advertising budget

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:

1. Degree of competitiveness in market

It can be in terms of 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. Thus depending upon the competition the advertising budget is set.

2. Market Share: Market leader/Market Follower

The advertising 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. Thus, where a company stands is a deciding factor in advertising budget

3. Product life-cycle stage

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.

4. Advertising Frequency

An ad can be played only once or can be be multiple times. Also, it can be daily, weekly, fortnightly, monthly etc. Depending upon the requirement, the advertising budget is altered.

All these factors are responsible in creating a efficient advertising budget.

Methods of advertising budget allocation

There are various approaches which businesses use to calculate their advertising budget:

1. Percentage of Sales

In this method the advertising budget is calculated as certain fixed percentage of the sales or estimated sales. This is a preferred method by a lot of companies.

It makes sure that the advertising budget is always proportional to the sales done.

2. Comparison with Competitor

In this method the advertising budget is estimated based on competitors promotional spending. Either equal, more or less depending on the objectives of the company.

3. Affordability

In this method the budget for advertising 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.

4. 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.

5. Intuitive

In this method, seasoned managers take decisions of allocating advertising budget for advertisements based on their experience and intuition. This method is based on the past experiences of the company

6. All available funds

In this, the organization is focused 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.

Thus, this summarizes the advertising budget allocation methods

Advertising budget process

There are certain steps which can be followed in creating a advertising budget. They can be explained as below:

1. Understanding advertising objectives based on the goals which have been set by the company

2. Determine the tasks, ad campaigns which could be done

3. Formulating, evaluating and preparing the breakup of advertising budget

4. Taking approvals form the senior management

5. Allocation of funds for different activities under the advertising budget

6. Monitoring and controlling the expenditure and revising it for better profit

Hence, this concludes the definition of Advertising Budget along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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