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Setting the Advertising Budget

Setting an advertising objective is easy, but achieving the objective requires a well-thought out strategy. One key factor affecting the strategy used to achieve advertising objectives is how much money an organization has to spend. The funds designated for advertising make up the advertising budget and it reflects the amount an organization is willing (i.e., approved by high-level management) to commit to achieve its advertising objectives.

Organizations use several methods for determining advertising budgets including:

• Percentage of Sales – Under this approach advertising spending is set based on either a percentage of previous sales or a percentage of forecasted sales. For example, an organization may set next year’s advertising budget at 10% of this year’s sales level. One problem with this approach is that the budget is based on what has already happened and not what is expected to occur. If the overall market grows rapidly in the following year, the 10% level from the previous year may be well below what is necessary for the company to maintain or increase its market share. Alternatively, companies may consider allocating advertising funds based on a percentage of forecasted sales. In this way advertising is viewed as a driver of future sales and spending on advertising is linked directly to meeting future sales forecasts. However, since future sales are not guaranteed, the actual percentage spent may be considerably higher than expected if the sales forecast is greater than what actually occurs.
• What is Affordable – Many smaller companies find spending of any kind to be constraining. In this situation, advertising may be just one of several tightly allocated spending areas and, thus, the level spent on advertising may vary over time. For these companies, advertising may only occur when extra funds are available.
• Best Guess – Companies entering new markets often lack knowledge of how much advertising is needed to achieve their objectives. In cases where the market is not well understood, marketers may rely on their best judgment (i.e., executive’s experience) of what the advertising budget should be.

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