What is an ad budget? Explain methods for determining an ad budget

ADVERTISING BUDGET

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.