Despite all the time, energy, and thought given to it, the budget allocation has still remained one of the most difficult tasks that any media planner faces it. The reason why budgeting is difficult in the advertising world is that advertising is one of the many elements which contribute to selling a product or service. Other elements of a marketing mix are pricing, sales promotions, direct selling, packaging, and so on and who is able to determine which element has the most contribution to increasing your selling which might be one of your marketing goals?
Despite the uncertainty discussed above, advertising budget must be established and this would take place based on as much information as is available at the time of budget allocation. The most taken strategy by firms are listed below and your budget, marketing goals, and many other factors by your side will guide you to take one of these strategies. First of all, we are going to discuss traditional methods of budget allocation.
Types of methods used by many advertisers are percent of sales, competitive spending, objective and task, expenditure per unit and subjectively judgment of what is affordable. So let’s find out the characteristics of each by discussing them one by one.
Percent of Sales is one of the easiest ways to set the advertising budget. This method is based on a multiplier which multiplies by revenue of sales. How big or small this multiplier should be depends on your industry and marketing situation. The rule is the more advertising is used instead of personal selling in order to increase sales, the higher multiplier should be.
One critique of this method is the advertising budget will decrease whenever the revenue from sales drops down and it’s somewhat illogical because one way to increase the selling revenue is to advertise your product or service but this method suggest declining the needed budget. That this method will result in declining research budget allocated to find the relationship between marketing endeavors and sales is another criticism of this method.
However, this method is usually used as a starting point and after that, considering any special marketing situation, the total money can be adjusted to compensate for the expenditures which are needed. One thing you should remember is that this method is somehow a low-risk policy for firms that don’t have a better understanding of the effect of advertising than do their competitors.
Competitive Spending suggests a relational budget setting to the competitors’ budget. This method is based on the market share of a brand and by selecting this method, firms usually spend as much as their market share in comparison to their major competitors.
One imperfection of this approach is that it assumes competitors exactly know what they’re doing and have the same marketing goals as one’s own. In other hands, the perceived message about an advertising is related to the brand beyond that and this would make it difficult to say if you spend on advertising the same way as your competitor you will get the same result at the end.
Objective and task begins with defining specific marketing goals then the total cost of obtaining each goal will represent the budget. Two major critique is marketers usually don’t know the exact cost of achieving the goals, and the value of the defined goals and the effect of each one on the brand would not be assumed in such an approach.
Expenditure per Unit is almost identical to a percent of sale strategy which means any pros and cons of that strategy will be applied to this method. The difference between these methods is that expenditure per unit will generate the budget considering the units sold, not dollar sales.
The unit basis of this approach is one more disadvantage of it. The company might lose control of revenue particularly if the firm has a wide range of products and prices. The unit basis also results working with fix rates of expenditure so it wouldn’t assume the calculation of the inflation and this method needs to be revised once in a year.
Subjective Budgeting involves decision making based on experience and judgment. This method will be supported by the experience of the media planner who has the intuition and insight to determine in a subjective way. One of the most used method by this manner is “all we can afford”.
At first glance, it might seem illogical to make decisions in such a way, but it would be realistic because the decision maker will account all of the costs and the remaining will spend in marketing a portion of which is advertising and media budget.
It’s not a defendable approach and not suitable especially when the planner has to explain the expenditure to whom thinks the advertising expenditure is more expense rather than investment.
The most commonly used approach is objective and task and as shown above, each method has its own disadvantages and none is perfect. So it’s necessary to combine any method you choose with other methods. The mentioned method, objective and task, has been usually combined with a percent of sale and what is affordable method (C. L. Hung and Douglas C. West, 1991).
-The most appropriate method in unstable settings such as Iran
Some advertising professionals believe that the best way to determine what size of the budget is suitable for your business is to experiment with a various type of expenditure and see the results. By this method, you have to spend more time and money to find out the best way of allocating your advertising budget. Not only the time and money expenditure but also expiring of the way found by your experience caused by the passing of the time are disadvantages of this experimental method.
The methods discussed above are the ways that any media planner, manager, or anyone else who is responsible for allocating marketing and advertising budget might take. These methods might differ in action according to the settings of the market. Many might say if you are in an unstable setting you won’t be able to anticipate your future market condition so you’re not able to determine the best size of your advertising budget unless with high uncertainty and risk.
As Armani Media Agency has tested in Iran, one of the settings with a high degree of instability, notwithstanding the high degree of uncertainty, planning and deciding is better than doing randomly and this situation emphasizes the need of having experts who have been working in such condition. This specific condition might be the very case that you have to have an experts of your market by your side and decide about your marketing, advertising, and media budget in a subjective manner which we’ve discussed as subjective budgeting.
So as you might have found out earlier, no globally prescription is there for determining the size of the budget allocated to your future advertising campaign. All said above are starting points and the best source of budget allocation guidance is the one who is the expert in that specific market. In the near future, we’ll talk about factors which affect the size of the advertising budget.