METHODS OF ADVERTISING

BUDGET
BUDGET DECISIONS
Major Decisions in Advertising
 Budget Decisions
• Establishing the budget

• Budgeting approaches
• - Top-down budgeting
- Bottom-up budgeting

• Allocating the budget

 Top-Down Budgeting

Top Management Sets the

Spending Limit

The Promotion Budget Is Set to Stay

Within the Spending Limit
 Top-Down Budgeting

• Arbitrary (illogical) allocation

• The affordable Method
• Historical Method
• Percentage of Sales
• Competitive-parity Method
• Return on investment (ROI)
 The Affordable Method

• It is used when a company allocates whatever is left over

to advertising.
• It is common among small firms and certain non-
marketing-driven large firms.
• Companies using this approach don’t value advertising as
a strategic imperative.
• Weakness: it often does not allocate enough money.
 Historical Method

• Historical information is the source for this common

budgeting method.
• The inflation rate and other marketplace factors can be
used to adjust the advertising amount.
 Percentage-of-Sales Method

• It compares the total sales with the total advertising

budget during the previous year or the average of several
years to compute a percentage.
 Percentage-of-Sales Method

• Pros
– Financially safe
– Stable
 Percentage-of-Sales Method

• Cons
– Misallocation
– Difficult to employ for new product introductions.
– Sales↓ → Advertising budget↓
 Competitive-Parity Method

• This method uses competitors’ budgets as benchmarks

and relates the amount invested in advertising to the
product’s share of market.
 Competitive-Parity Method

• Pros
– Spending what competitors spend helps prevent
promotion wars.
• Cons
– Companies differ greatly.
– There is no evidence that budgets based on
competitive parity prevent promotion wars. (Prisoners’
Dilemma)
 Return on Investment (ROI)

• In this method, advertising and promotions are considered

investment, like plant and equipment. Thus, the budgetary
appropriation leads to certain returns.

• While the ROI method looks good on paper, the reality is that
it is rarely possible to assess the returns provided by the
promotional effort – at least as long as sales continue to be the
basis for evaluation.
 Which advertisement budget method is
generally a best bet?

Objective and Task

All You Can Afford Budgeting Methods Percent of Sales

(note: this is not a (note: Future or
good idea usually… past)
Proceed with
caution.
Competitive-Parity
Factors Influencing Advertising Budgets

Product Hidden product

life cycle qualities

Product Product
durability price

Purchase
Differentiation frequency
 Whichever method you choose, budgets
vary due to:

 Target Market(s)
 Desired Positioning
 Role of Promotion in Positioning
 Product Characteristics
 Stage of Life Cycle
 Situation Specific Factors (examples?)