Every brand sets a budget aside for advertising activities this budget is referred to as advertising appropriation. The advertising appropriation is determined by various factors. These factors explained below will help you understand how to decide the amount of money to spend on advertising.
1. Percentage of sales method
In this method, the amount decided for advertisement is calculated by multiplying the value of past year sales for the budget period with a pre-determined percentage i.e.
Advertising budget amount = Past year sales x pre-determined percentage
This method is not as complex as the advertising budget is determined by the sales a company has made. At the same time, this method is not used on a large scale because of the changing market conditions, and considering just past sales is not considered to be an effective indicator.
2. Objective and task method
Objective and task method is one of the most favourable methods used to decide the advertising budget. This method considers companies objective and identifies the task that can be done to achieve these objectives. For using this method, a business should have a thorough evaluation of business goals both internal and external, business goals may be in the form of sales, profit, brand image, etc. Objective and task method works the best as company allocates a certain amount of money to its marketing budget based on specific objectives, rather than choosing an arbitrary amount or basing its marketing budget on sales revenues or projections alone
3. Affordable method
This method means that the company will decide an advertising budget on what they think they can afford. This method is mostly used by small businesses. After a company is done with all fixed and unavoidable expenses the left-over money is allocated to advertising. In some cases, the budget is very less due to distributing funds on other cooperate activities, on the other hand, there is a possibility that the amount left for advertising is huge. This method does not encourage long term planning.
4. The unit of sale method
The unit of sale decides the size of the budget. In the unit-of-sales method, you set aside a fixed sum for each unit of product to be sold, based on your experience and trade knowledge of how much advertising it takes to sell each unit. The unit of sale is the basis of budgeting for durable goods and industrial goods. This method can be applied for a longer period.
5. Return on investment method
According to this method sales and profits are correlated with advertising expenditure. Advertising expenditure in one year generates the sale for many years. In this method, the advertiser spends on advertising until the return on investment is a normal rate of return. In the ROI budgeting method, advertising and promotions are considered investments, like plant and equipment. In other words, investments in advertisements lead to certain returns. Like other aspects of the firm’s efforts, advertising and promotion are expected to earn a certain return.
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