AD BUDGETING

Budgeting
There are several decision rules on which
many firms make budget decisions. Three
such rules are:
 Percentage of sales
 All you can afford
 Competitive Parity
 Percentage of sales
One rule of thumb used in setting
advertising budgets is the percentage of
sales. Past sales or a forecast of future
sales can be used as the base. A major
flaw in the method is that it does not rest
on the premise that advertising can
influence sales, rather sales or a sales
estimate determine advertising
expenditures
Situations where Percentage of sales
does not work
The Percentage of sales approach needs to be
modified in dynamic situations such as the
following:
 When a brand is making a major repositioning
move: When a brand decides to make a
repositioning move, a substantial increase in
advertising might be necessary, an increase that
might not be justified by the percentage of sales
logic
Situations where Percentage of sales
does not work
 When a brand becomes established and
dominant: An established and dominant
brand can usually start reducing the
percentage of sales allocated in
advertising. As brand-name awareness
becomes very high and the brand’s image
becomes very set, it is not usually
necessary to advertise as heavily.
Situations where Percentage of sales
does not work
 When a brand is just being introduced : A
new product, concept or a brand will have
the special task of generating awareness
from a zero level. As a result it is usually
necessary to make heavy investments in
advertising during the first year or two of
the brand’s life
 All you can afford
Some firms with limited resources decide to
spend all that they can reasonably allocate to
advertising after other unavoidable expenditures
have been calculated.
Some large firms also use this rule as there is no
realisation that advertising may influence sales.
They start with the sales forecast and budget all
expenditures, including profit, except
advertising. The only reason advertising is
included is that its absence would be difficult to
justify!
 Competitive Parity
Another common guide is to adjust the
advertising budget so that it is comparable
to those of competitors. The logic is that
the collective minds of the firms in the
industry will probably generate advertising
budgets that are somewhat close to the
optimal
Situations where Competitive Parity
does not work
The problem in competitive parity is that
there is no guarantee that a group of firms
is spending at optimal level. Even if they
are, it is likely that the situations of
individual firms are sufficiently unique so
that the practices of their competitors
should not be followed