Methods of Establishing the Advertising Budget

One of the most different marketing decisions a company face is how much spend on
advertising. Because companies vary considerably in advertising budget. Here we will describe
four common methods used to set the advertising budget for a company:
1. The affordable Method:
A company may think of their affordability to set the advertising budget. Company
allots as much as it can afford in connection with advertising without considering any
factor influencing the appropriation. This method completely ignores the role of
promotion as an investment and the immediate impact of advertising on sales volume.
It leads to an uncertain annual advertising budget which makes long-range market
planning difficult.
2. Percentage of-sales method:
Many companies set their advertising budget at a specific percentage on sales either
current or anticipated. The percentage may be based on the past years sales, or
estimated sales for the coming year, or on some combination of these two. This method
encourages management to think in terms of the relationship between promotion cost,
selling price and profit per unit. But this method does not provide a logical basis for
choosing the specific percentage except what has been done in the past or what
competitors are doing.
3. Competitive Parity Method:
Some companies set their advertising budget to achieve share-of-voice parity with their
Competitors. This method consists of setting the appropriation by relating it in some
manner to the expenditures of the rival firms. This method may involve in using the
average percentage of sales spent by the firms in the entire industry. This type of
company believes that by spending the same percentage of his sales on advertising as
his competitors he will maintain his market. This is not a sound method of
appropriation, since not all firms use the same marketing strategy nor do they have the
same advertising objectives, nor they have the same market position.
4. Objective and Task:
The objective and task method calls upon marketers to develop their advertising
budgets y defining their specific objectives, determining the tasks that must be
performed to achieve these objectives and estimating the costs of performing these
tasks. The sum of these costs is the proposed advertising budget. When this method is
used, the first step is to set the objectives of the program for the coming year or budget
period. It definitely relates the amount of money to be sent on the specific tasks
required to achieve the established objectives.