Did you know that the US advertising budget surpassed $500 billion in 2019 alone?
It’s no surprise, considering the number of advertisements we see around us daily.
With so many accessible and cost-effective marketing channels available, even small businesses are doubling down on efforts to promote their brand to users.
Here is the perfect guide on everything you need to know when drafting a budget for your advertising strategy:
Determining your advertising budget
Before determining a budget for advertising, you need to assess the market.
To do that, you need to analyze the following:
#1. Percentage of sales
If the product or service you are offering is something that has been a repeat product, then it would be pertinent to see your previous sales records of the product as well as how that was impacted by the marketing budget.
By analyzing previous records, you can identify any patterns or correlations between your budget for advertising and your product sales.
This method is based purely on predictions and long-run projections, and they can be super helpful for established companies that have fixed annual sales.
If, however, there is a need for increasing promotional activities down the road, then this method will be at a disadvantage as the budget is fixed and inflexible.
This method of determining the marketing budget is usually employed by small businesses.
The budget is kept flexible and is adjusted according to the level of money available.
Although this may not be the most intuitive way to decide on an appropriate budget, it can help to define clear outlines for your advertising goals.
There’s no shame with working under a tight budget and budgeting in a prudent manner can lead to higher returns in the future.
#3. Winging it
I’ve outlined several possible methods you can employ to determine your marketing budget, but they’ve all been conditional on your experience with marketing.
However, if your business is new and this is your first foray into the advertising world, then you might have to “guesstimate” your marketing budget.
Of course, you would still be constricted by your overall budget, but beyond that limitation, deciding the correct amount would be entirely up to your discretion.
Factors that will impact your advertising budget:
Before any significant decisions are made in terms of a marketing budget, it is never a bad idea to examine the ongoing market trends. Upon thorough examination, conclusive decisions can be made with regard to advertising.
Some factors to examine include:
#1. How often will the advertisement be run?
Perhaps the major contributor to spending made on advertising comes as a direct result of how often the ad is being run. The frequency of the ad, as well as the time slots they will be run in, are a major determinant of the advertisement budget.
This, of course, is mainly applicable to television advertising as prime-time slots will be more expensive than those during other times. Other platforms like Instagram and Facebook are not restricted by this concept.
#2. Who’s your competition?
Advertising is a game that requires much thought and inspection. The primary thing you need to make note of is your competition.
If your competition is showcasing a lot of ads for the same products, then adding your own advertisement to the mix may occur in cluttering.
This would imply that the company will need to seek out alternative means to promote their goods, which may lead to an increase in the spending on advertisements.
The above image shows some clever marketing done by Coca Cola. In it, Coca Cola turned a targeted advertisement by Pepsi into promotional content for themselves.
Note the difference in taglines and how such a small change can lead to such different implications. Very clever marketing indeed!
#3. Market share
One of the major reasons companies advertise their products is to gain greater control over the market, which results in an increased market share.
This means that the relationship between how much market share you wish to capture and marketing budget is directly proportional.
So, if you’re aiming to gain control over a greater level of market share, you’ll automatically have to increase your budget for advertising.
#4. Product life cycle stage:
Another major determinant of your budget for advertising is the life-cycle stage the product is currently in.
If the product or the company is relatively new to the game, then this could mean you would have to spend more to make your product more widely recognized.
Once your product has become well known and has carved its share in the market, you can reduce the budget allocation for advertising and focus on other aspects of your goods, even expand your product range.
Approaches to creating an advertising budget:
Theoretically, there are two main approaches to creating a marketing budget that fits your needs perfectly.
Within these two approaches, there are other methods that can outline more specific approaches to creating a budget.
#1. Top-down approach
In this particular approach, the upper levels of management determine the spending limit, as well as the allocation limit of the ads.
This means that all the advertising strategies are dependent on the set budget, and the budget is not linked to the objectives directly.
The top-down approach itself contains a wide variety of other methodologies. These include:
1. The affordable method:
This method follows a basic approach, where the leftover of the financial budget is simply redirected to the marketing budget.
This methodology is commonly followed by smaller businesses, whose main target is product development.
The major issue with this approach is that it does not take the advertising objectives into account, and this can result in some unclear budget allocation resulting in either over or underspending.
2. Arbitrary allocation method:
As the name indicates, this method relies on gut instinct, and the advertisement budget is simply dependent on the decision-makers.
This approach clearly lacks systematic thinking where top management simply decides on an amount that should be spent on advertising.
3. As a percentage of sales method:
This method is usually employed by medium-sized companies, and a fixed percentage of sales is allocated towards the advertising budget.
This simply means that a higher number of sales would lead to a greater budget for advertising.
A clear advantage of this approach is that it is simplistic in nature, and the expenditures are directly related to the number of funds available.
The disadvantage of this approach is that it does not take into account that a disproportionate increase in the budget for advertising can lead to a future rise in sales.
This approach can also result in over or under spending and can lead to an unfixed budget for each product cycle.
So, for newly released products, this approach can be a bit difficult as it will be hard to determine the number of potential sales.
4. Competitive parity method:
This particular method takes intimate note of competitor’s expenditure on advertising, and the budget is decided by merely matching the percentage of sales allocation the competitors are following.
This approach merely makes use of the collective wisdom of competitor’s budgeting strategies, and if properly utilized, it can result in reaching an optimum budgeting level.
However, this approach’s main disadvantage is that each organization takes into account its own objectives before finalizing a budget for advertising.
As marketing objectives tend to be so specific, it means that making an amalgamated strategy is not exactly efficient as no universal guidelines for advertising are being followed.
#2. Build-up approach
In this approach, the advertising objectives are set, and the activities required to achieve those objectives are planned.
The costs of different advertising elements within the strategy are budgeted, and this helps finalize a budgeting outline.
Some more specific approaches that fall under this method include:
1. Objective and task method
This method follows a detailed approach that links the selling objectives with the budgeting.
This particular method involves having a definitive advertising objective along with specific strategies that will be required to achieve them.
All activities that are a part of the advertising scheme are taken into account, which is ultimately used to determine a budget for advertising.
This method follows the ground-up approach and comes with its unique advantages.
In it, a proper managerial approach is used, which is not dependent on forecasts and sales projections, which tend to be unreliable in nature.
However, the downside of this approach is that it requires a highly knowledgeable team.
If a company is small or just starting out, it may not have the funds required to hire people who are skilled enough to implement this procedure.
2. Pay-out planning
This method is specifically designed for new products that are ready to be launched.
The main aim of this methodology is to increase the awareness of a new product and also make it more widely accepted in the market.
This method follows a highly technical procedure in order to allocate a budget for advertising.
By taking into account the potential rate of return on advertisements, and creating linkages to the investment value of advertising as well as the potential revenue the product will generate, a marketing budget is set.
This method initially results in high advertising expenditure, but eventually, a break-even point is reached, which is followed by a steady decline once the sale of the products rises.
This logical planning tool is highly useful, but it does not factor in things like competition, new technology, or changes in government policies, all of which have the potential to change the sales of a product.
3. Quantitative models
This method follows a purely mathematical approach, where regression analysis is used to determine the effect of advertising expenditure on sales.
This method is highly time-consuming and requires a specific statistical skill-set to carry out properly.
4. Experimental approach
This approach is an alternative for quantitative models where the advertising is done on an experimental basis.
In it, some areas are selected to be directly marketed to, and different advertising strategies along with their budget, are taken note of.
The level of exposure is measured across different areas that are being targeted, and the results of the strategies are measured both before and after. The varying results are then compared with the marketing budget levels along with how they fulfill advertising objectives.
This process is an expensive and time-consuming method and cannot be universally carried out.
The above image outlines the major differences in the Top-Down and Bottoms-Up approaches.
The ongoing trends for advertising
Nowadays, there are a variety of channels through which one can market their products.
With the advent of social media, traditional media like television, newspapers, and radio are steadily taking the backseat, and new media like YouTube, Facebook, and Instagram are becoming more widely used.
Several reports that have been tracking both online and offline advertising have showcased some interesting allocation of advertising funds across different media platforms.
On average, a firm allocated 45% of its total advertising budget online.
The second-largest share of a marketing budget went towards search engine marketing or banner ads that are present on websites.
This shift in trends indicates the growing share of digital media in terms of marketing.
In a 2019 report, 97% of marketers were investing in some form of paid social advertising, a rise of 10% from the previous year. 91% of this group was focusing on Facebook ads, while 69% were also using Instagram.
A more detailed marketing spread is captured in the image below:
For some time now, marketers have been making note of the viewership shift from traditional media to social media.
Over time, investment in traditional advertising has been falling by single-digit figures, while at the same time, digital media has been increasing by double digits.
The shift has occurred from television, radio, and newspapers to search engines, email, SMS marketing, and social media.
If your target market is for older people, then traditional media may be the best path for you.
However, it is becoming increasingly clear that the advertising game as a whole is changing.
Short product reviews are not what’s improving brand awareness anymore.
Rather, a greater social media presence is improving engagement with the customer base the most.
Take Wendy’s, a popular restaurant chain in the US, as an example.
Wendy’s is just a regular fast-food chain, not unlike any of the others that keep cropping up.
Their rise in popularity on social media can be attributed to their witty Twitter feed, where they regularly downplay other fast-food chains and promote their own.
This form of advertising may seem risky, but it’s clearly working.
Their customer base, comprised mainly of young adults, responds positively to their witty “clap-backs”, at times even instigating Wendy’s twitter to get a response.
There are myriad ways to promote your products, some of which are more costly than others. How much your company earns is the main constraint for setting aside a marketing budget.
Ultimately, how you chose to allocate your budget for advertising is up to your discretion, but thinking outside of the norms of traditional media can lead to more cost-effective and successful campaigns.