How to Determine the Advertising Budget?

As the old adage says, “you should spend money to make money”, advertising spending is always an essential part of marketing budget. Although there is no direct relationship between advertising spending and sales, carefully determine advertising budget could better help marketers set their marketing strategy, and finally advertising spending will become the investment of building brand.

Here are four common methods to determine the advertising budget,

#1. “Share of Market” method. With this method a business equates its market share with its advertising expenditures.


– Easy to estimate. The only two data marketers need to know are company’s market share/estimated market share and industry media spending.                                                 

– This method bases advertising budget on external market trends, and so it is useful for marketer to clearly define company’s positioning and reflect its standing.


–  This method ultimately predicates that company’s advertising is on an arbitrary guideline that does not adequately reflect future goals.

–  Directly connect ads budget with market share and ignore the power of effective ads campaigns. Even if $1 could usually drive 1% market share, however effective $1 advertising campaigns may generate 2% market share.


#2. “Percentage of Sales” method. When using this method an advertiser takes a percentage of either past or anticipated sales and allocates that percentage of the overall budget to advertising.


–  This method is useful for a conservative estimation, especially safe if the ownership feels that future returns cannot be safely anticipated.                                                                    

–  This method directly relate expenditures to funds available, and suitable for company who is experienced in allocating current funds.


–  Not accurate. If a company launch a new product without historical data, it could be very inaccurate because the advertising budget will base on a predicting sales/revenue.

–  Sales and budget are not always consistent. If a product is in the introduction phase, which means its sales may very low (or even no profits in the first year) however it need more advertising budget to help it open up the market.


#3. “Objective and task” method. With this method, a business needs to first establish concrete marketing objectives, often articulated in the “selling proposal,” and then develop complementary advertising objectives articulated in the “positioning statement.”


– This method make limited budget on the point of sales. If properly executed, the advertising becomes an investment.

– It’s accurate because this method ties the use of funds directly to the tasks the company wants to accomplish.

– This method let the company focus on its marketing goals.


–  This is the most difficult and complicated method. Before calculate the budget, marketer have to determine company’s specific marketing objectives, the tasks needed to accomplish these objectives, and the estimated costs associated with completing these tasks.


#4. “Match competitors” method.


– Easy to estimate. To use this method, marketer only needs to match company’s advertising spending with its direct competitor.

– This method is a good way to draw lessons from competitor’s good work and bad work.


– It assumes that the competitors’ experiences apply to ROC Mobile in the marketplace. ROC may ignore its current existing resources and its business features, and so miss opportunities to increase market share.

– This method may sink company into meaningless competition.

(Of course there are more methods, check here)


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