An advertising budget reflects the importance given to the function of advertising within a company. The budgeting process is the responsibility of the top management along with the marketing manager.
The advertising budget is both a planning and control device. There are many managerial functions that are performed through the process of budgeting. Managerial goals are discussed and are synchronized with marketing and advertising objectives. This provides a forum of communication that resolves conflicts and sets the priorities for the communication plan of the company.
An advertising budget is a plan that sets a limitation on advertising expenditures, states how expenditure will be allocated and controls the dispersement of expenditure over a designated period of time.
The process of budgeting is therefore a decision making process that divides the total appropriation under different expenses heads. For example if the total advertising budget for launching a new product is rupees two-three crores, then deciding that 1.5crores will be spent on the national media, is a budgeting decision.
WHO DECIDES THE ADVERTISING BUDGET
It is the primary responsibility of the advertising manger to prepare draft budget proposals. It is his duty to access the needs of the company with respect to the challenges posed by the market. He also takes into account the cost of the media, creative and actual production, while preparing the proposals. This draft budget then becomes the basis of discussion between the marketing manager and advertising manager and sometimes, even the advertising agency (especially when the agency has a long term relationship with the company. This result in final budget plan that is then recommended to the top management for approval. Though this is the most scientific process of arriving at the advertising budget, it is sometimes not followed, especially by small advertisers. In such circumstances the top management may decide upon the amount to be spent (budget appropriation) and the advertising manager will then plan how to allocate this sum between different expenditure heads.
METHODS OF SETTING THE ADVERTISING BUDGET
One of the most difficult tasks facing advertisers and ad agencies is the decision on the optimum money to be spent on advertising. Advertisers want to minimize expenditure and maximize the returns. Though advertising expenditure is considered to be an investment, its utilization has to be intelligent and profitable.
Though there are several accepted methods of arriving at the budget, the individual brand budget will depend upon several factors such as profitability, marketing objective and competitor’s position. The various methods, which are used, for setting advertising budgets are:
1. Percentage of sales method
2. Unit of sales method
3. Task and objective method
4. The competitive parity method
5. Brand history method
6. All you can afford method
7. The break even method
8. The quantitative method
9. Share of voice method
Each of these methods has certain advantages and disadvantages. In reality, a combination of these methods will be used.
1. PERCENTAGE OF SALES METHOD:
The percentage of sales method is the most widely used widely used method of setting the appropriation, although it has been criticized by many. The percentage is based on the past years’ sales or on estimated sales for the coming year or on some combination of these two. This is simplest method, as it requires little decision making. Many companies in India use this method to arrive at a tentative budget appropriation. But this method suffers from a basic drawback in that it does not take into account any specific need of the market situation. Moreover, when past sales are used to arrive at the current year’s budget, the figure may have more historical value rather than current utility. Advertising leads to sales and the amount of advertising expenditure depends upon the sales target and therefore, when the percentage of future sales is used the estimates are more realistic.
In conclusion one can say that this method is not appropriate as market situations change rapidly and past sales alone are not an effective indicator of the company’s communication needs.
2. UNIT OF SALES METHOD:
The unit sales method also relates the advertising expenditure of sales. In this approach, a percentage of the price of each unit of the item sold is allocated to advertising. Thus a soap manufacturer might budget that a cake of soap costing Rs.6/- will have Rs.1.50 as the advertising expenditure. Thus, if the manufacturer sells one lakh units, his expenditure on that brand will be Rs. 1.5 lakh. This approach is useful as it links the price of a brand with its advertising expenditure. This approach is simple to plan and execute. However, it does not lead to efficient marketing since past sales determine how much a firm should spend on advertising, when in fact advertising is a tool to create sales and expand markets. This also assumes that the advertiser is satisfied with the current rate of growth in sales. This is rarely so, as every advertiser aims at improving the rate of growth.
In an extreme situation if sales go down, a firm following this method will also reduce advertising expenditure. This will be disastrous for the company as it may lose its market rapidly to competitors.
In conclusion the unit of sales and percentage of sales method are not suitable to a dynamic market situation. However they are useful guides to give direction to planners who use them as a basis for deciding the ad budget, in combination with other methods.
3. TASK OBJECTIVE METHOD:
This method is gaining more popularity because it provides a more logical basis for deciding advertising appropriation. The objective task method concentrates on the marketing/advertising objectives that are pre-decided and ask these questions: what is the role of advertising in obtaining these objectives? How much should we spend to achieve these objectives?
Thus under this method a company launching a new product will decide to spend more money as it has to create immediate awareness amongst consumers.( for example Ranbaxy will spend more on its new product Olesan). For an existing well know brand, the company may spend less on advertising (for example Ranbaxy will spend less to advertise its product Garlic Pearls.)
As it is obvious in the above example, the objective task approach directs the efforts of manufactures to think through the objective while setting the budget.
There is one problem involved in the use of this method of setting the appropriation and that is: how does one determine just how much advertising and what type of advertising will achieve the stated objectives. The present methods of research do not give a direct link between advertising expenditures and achievement of the objectives. Until more sophisticated methods are developed managers will have to face this problem of uncertainty while deciding the optimum budget.
4. THE COMPETITIVE PARITY METHOD:
This is the most controversial method and few executives admit that they use it while preparing the budget. In this approach an advertiser bases his budget decision primarily on the expenditures of competitors. That is they try to keep pace with their competitor’s advertising budgets. This method could be useful in deciding individual brand ad expenditures. It has the advantage of recognizing the importance of competitors and ensure that the competitors do not increase their ad expenditure to a level that affects the advertiser’s sales. But the approach has disadvantages. Firstly your objective may be different from that of your competitors. And secondly it assumes that your competitors are spending optimally. It also maintains the present market position rather than bringing any positive change for the company. If you want to overtake your competitors you may have to spend more than them and spend this money more efficiently.
5. BRAND HISTORY METHOD:
Under this method the brand’s product life cycle is considered while setting the budget. Thus a brand at the introductory or pioneering stage will use more advertising appropriation than an established brand. Brands that are facing a decline may also use more advertising to add new life into it. For example Close Up, the toothpaste manufactures by Hindustan Lever had a stagnating market share till recently. In 1990 its spent Rs. 3.45 crore on television advertising with its new theme close up: “a mouth wash in tingling red and blue colours”. The result was that close up has over taken Promise and is now number two in the toothpaste market behind Colgate.
6. ALL YOU CAN AFFORD METHOD:
This approach means that the advertising budget will be decided on the basis of whatever money is left after all other fixed and unavoidable expenses have been allocated. This method seems to be illogical and unambitious but conservative management use this method as it is safe and ensure that there is no overspending. New entrepreneurs have no other option but to follow this method when they are short of funds.
7. THE BREAK EVEN METHOD:
The break even or the marginal analysis method attempts to quantify the advertising spending level that will offer an organization the highest additional gross profits. That is the firm continues to spend on the advertising as long as the incremental expenditure are exceeded by the marginal revenue they generate, thus maximizing the gross profits of the firm.
This method has an advantage because it helps in diagnosing any problem, that is when the company is overspending or under spending. But it suffers from the disadvantage of limited research techniques that cannot isolate the effect of advertising on marginal revenues and gross profits. Other activities such as personal selling and sales promotions also influence the revenue earned by a company. Moreover, it assumes that there is an immediate effect of advertising expenditure. This is possible in direct mail advertising. In most other advertising there is a carryover effect that is a potential consumer may be influenced by the ad, in the month of June but may make a purchase in December. Advertising may also attract customers who become loyal customers for several years. The immediate purchase measures up to only a small part of the value the firm enjoys from such continuous purchases. This drawback can be overcome by using the experimental method.
In the experimental method varying advertising expenditures are used in different cities. For example the advertising expenditure in Pune may be greater than the advertising expenditure in Hyderabad. Then sales in the two cities are compared to find out which is optimum level of expenditure.