How to Create a Realistic Advertising Budget
By building the value of products and brands, the advertising
budget represents a long-term investment in a company's future. Every dollar invested
in marketing communication is a seed planted for future growth. Although lengthy,
this article, which may be the most thorough on this topic available online, will
help you achieve the optimal return on your investment.
Advertising budgets are usually determined in one of four
1. By matching the competition. The
rationale goes something like this: "We know what Consolidated is spending so
we'd better not do any less (lest we lose market share) or more important (lest we eat into
2. By decree. The president of the company
(or its financial management) evaluates available resources, past advertising
budgets, very frequently other spending priorities, etc. then allocates an "appropriate"
3. The Percentage of Sales Method, which relates the advertising budget
to some arbitrary percentage of revenue.
4. By the Preferred Outcome Method. This
approach considers known data and reasonable assumptions tempered by judgment
and common sense to reach a realistic budget that will achieve the desired marketing
Let's take a brief look at each. The first approach
assumes absolute marketing parity with the competition, which rarely exists. It
fails to account for fundamental differences such as geography, number of sales
reps, dealer relationships, etc.
The Advertising Budget
Is A Primary Driver Of Sales
The second method, allocation by decree, should be
dismissed for several reasons. Not the least of these is that by relying on prior
budgets, it disregards changes in the competitive environment.
Despite the fact that it is likely to offer a much better return on investment,
the advertising budget, a primary driver of sales, may have trouble competing
with the urgency of a leaky factory roof or the allure of a new computer network
unless supported by a well-crafted plan. When the budget is set by decree,
the plan follows, rather than precedes, the allocation.
By eliminating feedback from the planning process, the allocation by decree
method also reduces the likelihood of sensible budget cuts based on prior
successes or new circumstances. Though conventional wisdom presupposes that no
one ever asks for less, it is clear that the marketing communication manager is
in a better position than anyone else to know his real needs. Efficiency and cost-reduction
are well served when senior management promotes a results-driven approach to budgeting.
Top-down approaches to setting the advertising budget invert the process
because financial people make the year's pivotal marketing decision. Then
they turn the spending process over to the marketing team. If they guess
too low, the entire allocation is wasted on a program with too little impact to
be effective. If they guess high, the extra funds may be spent on items of questionable
The third approach, percentage of sales, enjoys great
currency, primarily because it implies a certain mathematical elegance. My experience
is that this method tends to be a favorite among small businessmen because it
seems provide a quick answer while circumventing the need for extensive market
and situational analysis.
As we will see later, the percentage of sales approach can provide an
excellent starting point in setting the marketing communication budget —
if those involved in the process clearly understand the underlying assumptions
of the formula. Unfortunately, this is often not the case. Much of this article
will be devoted to developing a clear understanding of those assumptions.
We strongly believe that the most realistic — and
ultimately the most productive — approach is for senior management to request
an annual marketing communication plan, which provides a well-documented basis
for the funding request. It also provides a structure for sensible control throughout
the coming year. Satisfied that a solid case has been made, and that funds are
available, management can judiciously weigh the advertising budget request against
other spending options.
This approach, the Preferred Outcome Method is the only sensible framework
upon which to build an advertising budget.
This Isn't Your Father's
In order to understand what follows, it will be necessary
to consider some definitions. The first of these is the phrase advertising
budget, a term that dates back to the early 1900's. At Orwig Marketing Strategies,
we strongly believe that the phrase marketing communication budget better
reflects the broad scope of strategic messaging options available to the 21st
century marketer. Having said that, I will use the terms interchangeably throughout
Next, I would like to differentiate between product advertising and
promotional advertising, both of which can be elements of the marketing communication
process. In their strictest senses:
Product Advertising influences a prospect's
perception of the product or service. It is the type of advertising that makes
us want to own a product. While it may very well have an immediate effect on the
sales curve, product advertising should always be considered a long-term investment
in the brand's future.
Promotional Advertising offers an inducement that prompts an immediate
purchase. It offers the prospect a sale price, a cents-off coupon, a free gift
or some other incentive. Promotional advertising can be very effective
in the near term; however, it has negligible benefit over the long term. Used
continually, it has the effect of cheapening the brand.
This difference between product advertising and promotional
advertising will be explored in more detail in a future article on this website.
The importance of the distinction here is that almost
all discussions about advertising budgets advance a formula that relates the budget
to some percentage of sales. One must apply these formulas with care because they
are very specific mathematical models. What is seldom made clear is that in almost
every application of these formulas, the resulting advertising budget is intended
for brand building - not promotional advertising.
Some Special Considerations
The distinction between product advertising and promotional
advertising is particularly important for retail advertisers. The percentage figure
cited for many retail categories is very low. That's because the budget figure
that results from the calculation is intended to fund only the portion of advertising
that builds the store's brand image. It might be used for advertising that
is purely image building or it might pay for the portion of a "price and product"
ad that contributes to store image.
"Aha!" you say. "Some retail categories spend vast amounts on advertising
and it's all price and product." You are absolutely correct. Most supermarket
advertising is price-oriented. Aside from the fact that a substantial amount of
that advertising is paid by vendor money, most national supermarket chains have
built their brand image around "low, low prices." If you're a discounter, by all
means focus your branding message on prices. However, if you sell luxury products
to the carriage trade, you'd be better served by spending your branding budget
to create a more refined image.
By understanding that percentage formulas are intended to develop a brand-building
budget, the importance of vendor "co-op" becomes clearer. Co-op lets the retailer
enjoy a much larger presence because his small budget is applied only to the portion
of the ad that promotes the store - for example, the 10-second dealer tag at the
end of a vendor's 30-second TV commercial.
It is also easier to see why co-op money generally should be allocated
to a separate advertising account. If you budget using a formula based on the
percentages typical in your retail category then consider co-op to be part of
it, you will drastically under-fund the portion of your advertising intended to
differentiate your store from its competitors.
Before we leave the specialized area of retail advertising, I would be
remiss if I didn't point out that some percentage budgeting formulas for retail
stores relate the percentage to the store's profit. Then they subtract the cost
of rent, which may represent an important part of the store image. The remainder
is the advertising budget. For example, If your jewelry store is located on Rodeo
Drive in Beverly Hills, the high rent might result in an advertising budget of
zero. This, however, would be appropriate because in this case location is everything!
How Does Advertising
Fit Into The Overall Marketing Budget?
Let's consider the difference between the advertising
(or marketing communication) budget and the marketing budget, of
which it is a component. Most companies divide the marketing budget into three
categories. The best way to decide which expenses belong in each is to have a
clear understanding of their roles.
- The Advertising Budget - Advertising or marketing
communication sets the stage for sales by making us feel that we want or need
the product. It sometimes offers an incentive to "buy now." However; its primary
mission is to create strong, positive feelings about the product. The next
section contains an in-depth discussion about what is usually included in this
- The Direct Sales Budget - This includes all
the costs associated with placing a team of company salespeople or independent
representatives in front of prospects. In business-to-business marketing, the
prospect is often an end-user. In many consumer categories, the sales department's
prospect is a proxy for the end-user, such as a retail buyer. Items in the direct
sales budget typically consist of compensation for the sales force, travel, sales
manuals, sales conferences, and incentives as well as other direct and indirect
- The Sales Promotion Budget - Sales promotion
is, in effect, a bridge between advertising and direct sales. The sales promotion
budget funds all the initiatives that move a prospect who is predisposed to want
the product down the road toward an actual sale (or repeat sale). Some offer inducements.
Others "just keep our name out there." Items that belong in the sales promotion
budget are many and diverse: in-store displays, sweepstakes, premiums ("two box
tops and a quarter get you a decoder ring"), imprinted merchandise or apparel,
trade-show giveaways, etc. All items that are not primarily aimed at
improving attitudes about the product itself go into the sales promotion budget.
What Should Be Included
In The Advertising Budget?
Unless we clearly define which expenses to charge to
advertising or marketing communication, the entire budgeting process becomes an
academic exercise. The "marcom" budget is a frequent dumping ground for all kinds
of unrelated (or supposedly related) expense. Like weeds in a garden, these expenses
choke the life out of the marketing communication process.
Here's a common example. Stationery often is included in the advertising
budget. After all, it's a printed material and the marcom department buys most
of the printing. Stationery should be considered an office expense. Only the portion
used for purposes such as direct mail marketing should be charged to the marketing
As a rule of thumb, legitimate expenses deal with brand
and product building. Sales expenses should not be charged to marketing communication.
Here is a list of expenses that should typically be included - along with
- All paid media advertising - Magazine, TV, radio,
newspaper, etc. that contributes to the marketing function. As an example, Help
Wanted advertising would not be included.
- Production expense - Art, photography, talent
fees, ad preparation charges, agency fees and miscellaneous expenses related to
preparing the paid advertising.
- Collateral material - Brochures, mailing pieces,
catalogs, etc. intended to associate positive feelings with the company's products,
brands or services.
- Internet expense - Website design, maintenance
and hosting expense are included to the extent that they are incurred for marketing
communication. Add in Internet marketing expense (banner ads, etc.) and e-mail
The mission of online marketing communication is to
bring eager customers to the website where they can learn more about your products
or purchase them. As the Internet continues to evolve, marketing communication
represents a single aspect of a much larger presence on many company websites.
The cost of modules like customer relation management (CRM) and inventory management
should typically be charged to the appropriate departments.
E-commerce presents further issues. An e-store replaces or supplements
the company's conventional "bricks and mortar" outlets. Perhaps the associated
expense should be placed in an account similar to rent & utilities!
- Public relations - that advances the marketing
process is included. Preparation of an investor relations newsletter, for example,
should not be.
- Trade show display and booth expense - Although
many displays perform more of a sales promotion function, a well-designed exhibit
enhances the product story. To the extent that this is so, the cost to create
a display and the cost of booth rental are reasonably charged to the marketing
communication budget. The sales staff's travel and entertainment expense, however,
should be charged to the sales department. Charging these items to the marketing
communication budget creates a huge aberration, particularly for a company
with a small advertising budget. I will expand on this in the next section.
Step 1 In Creating
The Budget: Percentage Of Sales Is The First Cut
A good marketing communication plan doesn't flow from
the budget. The budget evolves as the plan takes shape. Having said that, creating
a budget that the company cannot (or will not) implement is a monumental waste
of time. There must be a starting point.
Determining a reasonable level of expenditure is relatively easy if there
is a track record. You start with last year's budget, perhaps adjusted for inflation.
But what do you do when:
- You're preparing to take the company into a new and
unknown market category?
- You are planning a marketing budget for a startup
- You are guiding a small business that is trying aggressive
marketing communication for the first time?
In situations like this,
the percent of sales technique can provide a reliable launch pad. The method
works like this. A ratio of advertising to sales, expressed as a percentage, is
determined based on industry norms. This number is often available from trade
associations. The percentage is then multiplied by company sales to determine
a reasonable budget figure.
The process can be further refined by applying the fixed
percentage to the sales of various products or service groups. This provides an
indication of how much should be allocated to each line. The technique can be
further distilled. Some planners go so far as to apply a different percentage
to each line or market.
The choice of sales data that will be used is more speculative. Options
1. Current year sales. In a growing
market or economy, this is the conservative approach. Obviously, it is not suited
2. Forecast sales. This relates the budget
to where the company reasonably projects its revenues will be in the coming year.
It's conservative in a growing economy; a little more risky in a shrinking one.
3. Moving average of sales. By averaging
the current year's sales results with forecast sales, this approach tempers optimism
4. Desired sales. The most aggressive option,
this one is based on the sales target that the company hopes to achieve by the
end of the accounting period.
The choice of which sales figure you will choose to
apply will depend on corporate philosophy, market growth, and business conditions,
among other factors. Clearly, you'll be more inclined to choose Desired Sales
if you're launching a hot, new, high-tech product with the potential to be a runaway
As elegant as this exercise seems, in the final analysis
it is only an estimate - a mathematical projection of reality based on a model.
Now we can see more clearly, why we have to be careful about what to include in
the advertising budget. Looking back to the discussion of trade show expense,
I said that the display and booth rental might be charged to the marketing communication
budget, while the sales staff's T&E, should be charged to the sales department.
You're welcome to define your budgets any way you'd like. Obviously, T&E
expense could be booked to the marketing communication budget. However, if you
do so, apply the percent of sales technique at your own peril. The mathematical
model is quite specific. If you load in expenses that aren't built into the model,
you will shortchange necessary brand building.
Assuming that the model is accurate and that we have applied the formula
properly, we're done. Right?
Not so fast.
Top marketers employ many complex tools to plan their marketing communication
budgets. However, far too many businesses simply apply the projections derived
from this simple model.
It represents much better practice to use the percent of sales method
to generate your "first cut" number. Think of your percent of sales number this
way: "This is where a company with sales like ours might be." "This is
a number our management can believe." The percent of sales tool is a great starting
point. It can take you to the right neighborhood, but it won't guide you through
the door of success.
Step 2: Now Let's
Consider The Real World
As compelling as it might be, the percent of sales
technique inverts causality. Rather than recognizing that sales are the logical
result of marketing communication, it implies that advertising is the consequence
of sales - whether based on results, forecasts (or dreams).
Modeling methods don't address the essential issue - reality. Next we'll
consider the way products and services are pre-sold by advertising. We'll also
look at your competition. What's their market share. Most importantly,
what share of the prospects' perception do they own?
Whether we are selling into consumer or business-to-business markets,
the buying process has four stages. They are:
1. Product awareness - By noting an advertising
message, we learn that the product exists. At this stage, mass marketing communication
is, by far, the most economical way to get the message out.
2. Attitude change - Subsequent marketing communication
messages result in an attitudinal change toward the product, which leads us to a
trial. For some products, particularly business-to-business products or services,
direct selling may also have a significant effect on our perceptions.
3. Product trial - We purchase the item or service, then
evaluate it. At this point, the product must survive based on its own merit.
4. Repeat purchase - Follow-on advertising reinforces our
trial experience with the hope of inducing a subsequent repurchase of the product.
At this point, let's review our definitions:
Product Advertising influences a prospect's
perception of the product or service. It is extremely effective in stages 1, 2
Promotional Advertising offers an inducement that prompts an immediate
purchase. Promotional advertising can have a beneficial short-term impact in stages
2, 3 and 4, but is unlikely to be effective at all in stage 1.
The following discussion, based on a substantial body
of research, deals with product advertising rather than promotional ads - the
kind that offer discount pricing or other incentives. Two issues determine the
success of product advertising: creative approach and media intensity. At Orwig
Marketing Strategies, we describe that intensity as media mass - the size
of the media portion of the advertising budget leveraged by the choice of
media and timing.
The percentage of an advertiser's media budget compared to the expenditures
by all advertisers in a product category is referred to as share of voice."
A substantial body of ongoing research has shown several long-term relationships
between share of voice and share of market:
1. A product's share of market will tend to
equal its share of voice.
2. Advertisers whose products enjoy a larger share of market can
safely make slight reductions in their share of voice. Conversely, products
with a smaller share of market must be supported with a larger share
of voice to avoid losing ground.
3. To increase market share, an advertiser must commit to a share of
voice that is somewhat higher than the share of market he intends to
4. New products typically need to be launched with a share of voice
that is double the share of market sought.
Although this research has been conducted on consumer
package goods, it has strong implications, particularly for first time advertisers
and for marketers launching a new product or entering a new market. The share
of voice comparison can be especially useful in clarifying what can realistically
be accomplished with the financial resources available.
Information about total spending in major consumer product categories
are tabulated and available from several sources. Companies marketing in narrow
business-to-business channels can often obtain a reasonable approximation of total
spending by tallying the costs of their competitors' ads in magazines and trade
show programs then adding an allowance for direct mail, online activity, etc.
3. Now, We Can Build
a Realistic, Objective-based Budget
Now that we have a feel for what needs to be done,
we can formulate a budget that is based on actual costs. Here's the procedure:
1. Clearly define your marketing objectives.
They should be measurable. For example, "By year-end, we intend to control 27%
of the oatmeal market in Pakistan."
2. List the best marketing communication options for each objective
- In the above illustration, we might consider:
a. Paid advertising
b. Unpaid advertising in Pakistani media - (Public Relations)
c. Messaging from the outside the country - (Internet, Satellite TV)
d. Distribute printed flyers
Compare the advantages and pitfalls of each. If dial
up and DSL access in Pakistan are unreliable and satellite downlinks are frequently
blocked by mountains, messaging from the outside may not be effective. Pick
the best option(s), then,
3. List the possible delivery media for each communication option.
For example, suppose you decide paid media and printed flyers are your best bet.
Your delivery media options might be:
Hire young men to pass them out at soccer matches
Drop them from airplanes
4. Consider the pros and cons of each medium
- Take everything into account. What's the likelihood of achieving effective reach
and frequency. How well suited is a particular medium to telling the "product
story." Looking at our example, what percentage of the population owns a radio?
How many people read the paper?
5. Add up the media and production costs - Gather the costs for
planning, research, creative work, production, media, printing, lead processing,
follow-up, etc. This is where the process can become difficult. In order to project
expense, you must have a very clear understanding of everything that might affect
your overall plan. Unless you're an expert in each area, you'll probably want
to seek assistance from outside professionals.
6. Make the final cut - Pick the best delivery medium (or media)
for each option. Then compare the communication options themselves. If an item
makes sense, add it to the budget. Keep adding until:
a. You reach your reasonable budget ceiling, or
b. You are satisfied that you don't have to add any more options to achieve
your objectives. Needless to say, in the real world this seldom happens.
Creating the objective-based budget is often iterative.
That is, you may find that "you just can't get there from here" considering the
funds available. If so, you should either cut the number of objectives or prioritize
them; then, if necessary, reduce expectations to a reasonable level. This is more
sensible than funding too many objectives with too few dollars, which almost invariably
leads to failure.
As we have seen, the procedure for creating a realistic advertising budget from scratch is complex. The budgeter begins by determining a reasonable approximation based on assumptions about spending norms within the industry. Next, he determines the level of communication activity that will be necessary to achieve success in influencing the marketplace. Then a list of marketing communication options is created and compared. Finally, as financial resources allow, the options are assembled into a plan from which the budget flows.
In addition to creating an objective-oriented, real world advertising
budget, the Preferred Outcome Method also helps management obtain a much clearer
picture of what really is possible given available resources.