One of the most important aspects of any business is determining the advertising budget. Where will each portion of the ad spend going, and how are we quantifying it? What’s the best ROI to use? The money we allocate to our advertising budget should be spent on realizing the different advertising goals we’ve set for our business. But what are they exactly?
How important is it to plan out your ad budget?
Not only does budgeting allow us to create a spending plan for our money, but it also helps us to be sure that we will have enough money for activities that are important to realize our marketing goals.
In addition to that, without setting an accurate budget, we won’t be able to find out what the correct return on investment (ROI) of our advertising efforts has been! Being able to track the success of our advertising activities is important, as many businesses view advertising as an expensive and expendable part of their operations!
How To Define Your Advertising Budget
Advertising is an indispensable investment for any company. Determining how much we need to spend annually can be a bit challenging, especially if we are running a starting business or a small-sized business.
It’s also important to consider that once the advertising efforts prove to be effective and manage to generate more sales for the business, it would be good to take another look at the ad budget to see if it needs additional investment.
Fortunately, there are a number of methods to help to define how much money we should be allocated to our advertising budget.
1. The Objective and Task method
Usually, budgets for advertising activities are determined before any plans on how the money is going to be spent are worked out. The Objective and Task method takes a contrasting approach, as it pushes businesses to prepare the major outlines of those plans before the budget is calculated.
It’s difficult to determine how much money we’ll need to spend if we don’t have a clue about what we are going to spend on it. On the other hand, it can also be quite hard to define the objectives without considering the available resources.
For Example:
- Creating the brand awareness
- Increasing the sales
- Driving the more website traffic
- Generating the more online signups
Once we have established what objectives are relevant for the business in the upcoming year, it’s time to (roughly) determine what strategies and advertising activities are necessary to achieve these objectives.
2. The Percentage of Sales Method
There are two ways to calculate the advertising budget, according to the Percentage of Sales method. The first way is based on the previous year’s sales, whereas the second is based on a forecast of sales to be made in the next year (future). In some cases, a combination of both these approaches is used.
Calculation of advertisement budget according to the percentage of sales method:
- Based on historical data: advertising budget = …% x sales [past data].
- Based on future sales: advertising budget = …% (fixed) x the total sales forecast for next year.
The percentage of sales method is often used due to the fact that it’s a fast and easy way to determine the advertising budget, in a way that is also easier to explain and justify to higher management.
It ensures that the advertising budget isn’t way out of proportion for the business.
A downside of following this method, however, is that it presents quite a static approach to advertising. At times in advertising, it’s inevitable and essential to be flexible and reactive to sudden changes in the business environment.
3. The Competitive Parity Method
According to the competitive-parity method, advertising budgets are established based on what a business’s competitors are (allegedly) spending or what is at par with the industry average.
The fact that this method is mainly executed for the motive of defending, maintaining, or achieving a competitive position makes this a defensive budgeting strategy.
One major disadvantage of this method is that it assumes that all competitive businesses hold the same advertising objectives and financial capacities. While, even though two businesses may sell a similar product or service, their objective could very well differ a lot from each other.
4. The Affordability Method
The affordability method is also known as the all-you-can-afford method, under which the advertising budget is merely based on what a business thinks it is able to afford.
While this is an extremely easy way to “determine” one’s advertising budget and is often used by small businesses, the method is generally highly unreliable as it is not based on any formula or objective.
This approach often leads to businesses spending either too much or too little on advertising in relation to its actual returns.
Great! We’ve now gone through some of the most used methods for determining our business’ advertising budget for the following year.
