A marketing budget provides a formal process for planning, tracking and measuring the impact of your expenditures on marketing communications activities such as advertising, direct marketing, online or events. The budget sets out the funding required to meet your communications objectives and provides a method of managing the expenditure over a budget year. Crafting a marketing communication budget serves as the advertising road map for the course of a year. Having a formal budget laid out lets the company carefully evaluate where it is spending the advertising money and gives complete control over the marketing initiatives. By having documentation that clearly outlines what are the expenses a company can more easily calculate the return on investment later and identify which marketing campaigns were profitable and which were not.
Advertising budget can be defined as “the portion of the total marketing budget that is allocated to advertising so that advertising objectives can be achieved within the specific period of time.”
It states the proposed advertising expenditure and serves as a decision-making tool for the management while allocating available funds to the various advertising functions and activities of the company. Marketing budget and its process is similar with the Sales Promotion budget and advertising budget. All three terms can be used interchangeably also due to close similarity. Advertising budget is prepared by Advertising Manager in consultation with Marketing Manager of the company. But in small business organisations, which do not have separate advertising department, the responsibility Of preparing ad-budget lies on top management or Marketing Manager.
Objectives of Marketing Budget
A business that does not have a budget or a plan will make decisions that do not contribute to the profitability of the business because managers lack a clear idea of goals Of the business. A budget serves five main objectives which are as follows:
- Communication: In the budgeting process, managers in every department justify the resources they need to achieve their goals. They explain to their superiors the scope and volume of their activities as well as how their tasks Will be performed. The communication between superiors and subordinates helps affirm their mutual commitment to company goals.
- Coordination: Different units in the company must also coordinate the many different tasks they perform. For example, the number and types of products to be marketed must be coordinated With the purchasing and manufacturing departments to ensure goods are available. Equipment may have to be purchased and installed. Advertising promotions may need to be planned and implemented. And all tasks have to be performed at the appropriate times.
- Planning: A budget is ultimately the plan for the operations of an organisation for a period of time. Many decisions are involved, and many questions must be answered. Old plans and processes are questioned as well as new plans and processes. Managers decide the most effective ways to perform each task. They ask whether a particular activity should still be performed and, if so, how. Managers ask what resources are available, and what additional resources will be needed.
- Control: Once a budget is finalised, it is the plan for the operations of the organisation. Managers have authority to spend within the budget and responsibility to achieve revenues specified within the budget. Budgets and actual revenues and expenditures are monitored constantly for variations and to determine whether the organisation is on target. If performance does not meet the budget, action can be taken immediately to adjust activities. Without constant monitoring, a company does not realise it is not on target until it is too late to make adjustments.
- Evaluation: One way to evaluate a manager is to compare the budget With actual performance. Did the manager reach the target revenue within the constraints of the targeted expenditures? of course, Other factors, such as market and general economic conditions, affect a manager’s performance. Whether a manager achieves targeted goals is an important part of managerial responsibility.
Following factors affect the size of marketing budget:
- Objectives to be Attained: How much the company is going to spend is determined by the objectives to be attained. Objectives act as the sheet anchor and the standards for advertising performance. These objectives are – bringing about increase in sales, introduction Of new products, supporting sales force, reaching inaccessible consumers, entering a new market, improving dealer relations, expanding industry’s sales, building up goodwill, building a brand preference, counter acting competition, dispelling the likely misunderstandings and so on. It is a particular sales objective or the set of objectives that shapes the advertising budget.
- Coverage Expectations: Advertising coverage implies the number of persons to be reached. It is the question of reaching a target audience through different media and media vehicles. The extent of coverage is influenced very much by the nature of the market enjoyed by the products.
- Product Class: Talking of only consumer goods, these have been classified into three categories, namely, convenience, shopping and specialty. In case Of convenience goods, they require a large advertising expenditure because of their intensive distribution and heavy dependence on mass advertising to sell in advance to the prospects before they shop.
- Stage in the product-life Cycle: Every product has its life-cycle consisting of four phases namely, introdluction, growth, maturity and decline. When a new product is introduced, it calls for the heaviest doses of advertising, and the budget gets blown-up. During the growth stage, the funds spend really substantial. However, when the product reaches the stage of maturity or saturation and the stage of decline, it is the price appeal that works than the advertising strategy. Hence, the advertising spending gets reduced considerably.
- Prevailing Economic Conditions: The economic activities not always the same. The economic system faces brisk and slack phases which are referred to as boom and slump phases of business cycle. During the sour economic conditions, majority of the companies cut back the advertising budget and during the period of boom conditions, they fatter their budgets beyond limits. This has been because, the business community thinks advertising as recurring expenditure than an investment.
- Age of the Company: A company which is seasoned and is known to the consumers will have certainly an advantage in introducing a new product or a service. People readily accept the new product in the light of its past dependable performance. On the other hand, a new company that has not introduced itself will sweat in introducing its products.
- Size of the Company: It goes without saying that a bigger company with vast financial resources within its easy reach Will have definitely liberal advertising budget. Even if it decides to spend, say, only 3% of its sales, the advertising funds will be quite substantial and the desired effects or results can be brought about easily. On the other hand, for a small company, it would work out almost 24
- Funds Available: An absolute limit is put on the advertising budget by what a company can afford irrespective of its age and size. The advertising manager has really wonderful ideas to increase the sales, profits to the firm and the satisfaction to the consumers. However, they are of no avail as they cannot be realised as funds are not available.
- Competitive Activities: It is the ability to size up the competitor or competitors and their activities than the ability to spend that pays rich dividends at times. The success of the advertiser rests on the strategic approach and spending. It is possible only when the advertiser knows -How much is his competitor spending? What is the format of his spending? What is his strategy? And so on. Most of the companies use their competitors’ budget pattern as their model for budget purposes.
- Approach to Advertising: The amount to be spent on advertising is also depending on the way in which it is looked upon. Traditionally, it has been accepted as the current expenditure like any other selling expenditure, however, nowadays, the attitude and philosophy has undergone a thorough change and it is more looked upon as an investment than a mere current expenditure because it has long-term cumulative effects on the company efforts and results.
Method to Determine Marketing Budget
Methods to determine the marketing budgets are same as in case of advertising budget determination; the difference is only that in case of advertising budget only one promotional tool i.e. advertising is taken where as in case of marketing budget a group of promotional tools are taken into account. Types of marketing budget include:
Percentage of Sales Method: In this method, the advertising budget is determined by the product of the value of previous year’s sales or estimated sales for the specified budget period and a predetermined percentage.
Advertising Budget Amount = Past Year’s Sales or Anticipated Sales x Pre-determined Percentage
Several factors such as nature of product, stage of product life cycle, availability of capital, level of competition faced in the market, amount of funds spend by rivals on advertising, etc., influence the pre-determined percentage, while calculating advertising budget. The total percentage of sales appropriated for advertising budget differs from industry to industry. For example, companies dealing in consumer durable goods such as cosmetic bmnds, appropriate 3040 per cent of sales for advertising budget, while other companies from steel or mining industry appropriate I -2 per cent of sales for advertising.
Competitive Parity Method: Some companies set their promotion budget to achieve share-of-voice parity With competitors. Proponents of this method argue that competitors’ expenditures represent the collective wisdom of the industry and that maintaining competitive parity prevnts promotion wars. Neither argument is valid. Company reputations, resources, opportunities, and objectives differ so much that comparing promotion budgets is not an appropriate guide. Furthermore, there is no evidence that budgets based on competitive parity discourage promotional wars. In this method, same amount or proportion of fund as that of the competitors is used by the firm for advertising. This traditional method is chosen to make the firm at par With competitors. In this approach, advertising is considered as a safeguarding mechanism and not an aggressive or combative mechanism. With a view to avoid any drawback, the company devotes same amount of funds as spend by the competitors. It includes gathering relevant information about the funds allocated by the competitors towards advertising. The basic postulation of this approach is that the company under consideration is aware about the activities being planned and executed by its competitors.
Objective and Task Method: Objective and task method is the most preferred and prudent approach of establishing advertising budget. The basis of this technique is to establish the advertising objectives and spot the different activities to be executed to accomplish those objectives. The role is typically identified in terms of a communication objective — e.g., to increase brand awareness by 20 percent — but could be stated as a marketing objective in terms of expected sales volume or market share, such as to increase market share from 15 to 20 percent over the budget timeframe. The objective-and-task method is the advertising budget procedure that is used most frequently by both consumer and industrial companies. Surveys have shown that over 60 per cent of consumer goods companies and 70 per cent of industrial goods companies adopt the objective-and-task approach to setting advertising budgets. The sequential procedures of the objective-and-task method Of budgeting are:
i) Establish the specific marketing objectives to be achieved; e.g., increases in sales volume and/or market share, and profit contribution.
ii) Assess the communication objectives that must be achieved to deliver the marketing objectives. (Both marketing and communication objectives must be specific, quantitative and measurable.)
iii) Determine advertising’s role in the total marketing communications mix in terms of achieving the three primary marketing communication functions; that is:
- To inform the target market about what the brand represents — its image,
- To persuade the target market about the brand’s benefits, and
- To remind the target market of the brand’s attributes.
iv) Establish the specific advertising goals that are required to achieve the communication objectives.
v) The final step is to establish the budget based on estimates of expenditures required to accomplish the marketing and the communications objectives. For example, television ads may be developed to increase brand awareness among the target market and, ultimately, substantially increase sales.
4) All You can Afford Method: A fixed or pre-decided share of financial resources or profits is the basis of establishing advertising budget in this method. The present earnings or profits available determine the maximum amount or limit of advertising budget. This method places rational limits on the advertising expenditure which is the only possible benefit to be derived from this method. This approach is unacceptable from the point of view of a reasonable marketing or logical marketing practice, as there is no obligatory relation between liquidity and advertising opportunity. A company may fail to take advantage of opportunities for improving sales figures and profit levels, if it restricts its advertising expenditure to the level of available funds. The all-you-can-afford method is usually a last resort practised by small firms that do not have the luxury of setting resources aside for promotion and advertising. For example, independent restaumnts and lodging companies that operate on very tight cashflows must meet their expenses such as paymll and inventory before they can consider the allocation of resources to promotion and advertising. If a small restaurant has only $2,000 to allocate, then the manager or owner must determine the most effective use of the funds.
Judgment Method: The judgment of experienced and senior managers of the firm forms the basis of determining the advertising budget under the judgment method. Under this method, the premises of deciding advertising budget are not the scientific lines, but the subjective or irrational thinking of few experienced managers. Through the years, these managers gam sufficient experience which makes them competent to strike the relevant advertising budget figure by using their own judgment. Various pertinent factors such as availability of funds, cost of employing different media, objectives of advertising, stage in product life cycle, nature Of consumers, activities and related responses Of competitors, etc., are considered by these managers while determining the entire amount Of advertising budget.
Increase over Last Year’s Budget: It is a customary approach to budgeting. The previous year’s budget is taken as the baseline by the managers for computing ad budget of the current year either by adding or subtracting from it as per the estimated requirements of the company. Increasing the previous year’s budget by a fixed percentage to facilitate a company to think about raising advertising expenditure and to render for planned increase in sales is included in this method. Advertising cost is increased due to increase in price level of advertising inputs. Therefore, this method is also called as ‘incremental budgeting’
Return on Investment Method: Here, costs incurred for advertising is regarded as an investment and not as usual revenue expenditure. Therefore, return on investment is completely a different approach in comparison with Other methods used for preparing ad budget. Advertising is also projected to contribute definite returns in the same way as any other investments of the company. An intangible asset ‘brand equity’ is established due to advertising which has a certain market value and can be sold at any stage in the market. Brand equity is pertinent to brand preference and brand acceptance. Usually, this income generated from advertising by the company, extends over a particular time-period. The total amount of expenditure of advertising incurred in one year fosters sales for many years and therefore, retums from the investment made in advertising are gained for several years in the future. The goodwill of the company increases as a result of advertising alongwith the rise in sales which brings increased profits for the company. The ROI method takes into account the long term results of advertising. The total amount of advertising budget is appropriated with the help of different capital budgeting techniques such as discounted cash flow, pay back method, net present value, etc. The firm keeps on spending on advertising till the return on investment is more than the standard rate Of return.
Quantitative Methods (Statistical Methods): Under this method, the entire advertising budget plan is developed with the help of various statistical techniques such as simulation or programming techniques, probability, multiple regression, etc. The probability technique is used to gauge the probability that a customer will buy the product if he is introduced to an advertisement copy. The technique of multiple regression aids to define the impact of different factors on the size of advertising budget. In other words, this technique computes the aggregate effect of all the factors influencing advertising budget. The interconnection between different advertising activities and the calculation of their effect on advertising budget is done through simulation technique. The use of quantitative methods has enlarged with the evolution of computers. Along with the various other methods available; this method of advertising also helps the advertising manager to determine the advertisement budget, despite the fact that the utilisation of these quantitative techniques is very tedious and can be utilised only by the experts.
Experimental Approach: It is considered as a substitute to the mathematical models and statistical methods. In order to ascertain the influence of input variations that can possibly be used, experiments and tests in one or more chosen market areas are utilised by the brand or promotion manager. The responses about the tests and experiments obtained are then used by the managers in calculating the advertising budget. The brand can be experimented at the same time in various Other market areas having identical conditions such as similar level of brand share, brand consumption, and population. For each market, different advertisement funds are determined. In each market. the sales and brand awareness are calculated before, during and after the tests. All this data is analysed so as to determine the variation in the advertising results based on the variation of advertising budget. The advertising objectives of the govern the level of budget planned by the managers. Evidently, all the disadvantages or drawbacks faced by Other budgeting techniques are eliminated by the experimental method.
Approval of marketing Budget
After preparing marketing budget, it is sent to top-management through marketing manager for necessary approval. In large organisatlons, this proposed ad-budget is evaluated, reviewed and scrutinised by high-powered-budget committee before submitting it to the top-management for final approval. Budget committee will ensure that proposed budget Will be effective enough to achieve marketing objectives. It Will also ensure that all the required activities to achieve mar.com objectives have been covered and the rates/cost of various activities is competitive, After approval by budget committee, it is presented before top-management. Top-management will see if the budget is affordable, need based and justified. Top-management can impose ceiling on proposed budget and send it back to budget-committee for necessary review. If it finds the budget justified and within affordable limit, then it will pass the budget.