An advertising budget is an estimate of a company’s promotional expenditures over a certain time period. More importantly, it is the money a company is willing to set aside to accomplish its marketing objectives.
Key Takeaways
- An advertising budget is the amount of money set aside for purposes of marketing and advertisements.
- The cost of advertising dollars must be weighed against the potential recognized revenues that those dollars will generate.
- Demographic research and customer segmentation can create profiles to help optimize the returns to advertising spending.
Understanding Advertising Budget
An advertising budget is part of a company’s overall sales or marketing budget that can be viewed as an investment in a company’s growth. The best advertising budgets—and campaigns—focus on customers’ needs and problems and provide solutions to these issues, not merely to address company problems such as overstock reduction.
When creating an advertising budget, a company must weigh the value of spending an advertising dollar against the potential revenue it will generate. Before deciding on a specific amount, companies should consider several crucial factors to ensure their advertising budget aligns with their promotional and marketing goals:
- The target consumer: Knowing your consumer and having their demographic profile can help guide advertising spend effectively.
- Best media type for the target consumer: Determine whether mobile or internet advertising (e.g., social media) is more suitable, or if traditional media (print, television, radio) better meet your target’s needs.
- Right approach for the target consumer: Decide if appealing to the consumer’s emotions or intelligence aligns with the product or service you’re offering.
- Expected profit from each dollar of advertising spending: This is often the most crucial and challenging question to answer.
The most effective advertising budgets and campaigns remain customer-centric, addressing their needs and solving their problems.
Advertising Budget Levels
Companies can determine their advertising budget levels in several different ways, each with its advantages and challenges:
- Spend as much as possible: This strategy sets aside just enough funds to run operations and is popular with startups experiencing positive returns on their marketing spend. It’s crucial to recognize when returns start diminishing and to adjust strategies accordingly.
- Allocate a percentage of sales: Allocate a specific percentage of the previous year’s total gross sales or average sales (commonly 2% to 5% of annual revenues). This method is straightforward and prudent but relies on past performance and may not respond well to a dynamic marketplace. It also assumes a direct correlation between sales and advertising.
- Spend what the competition spends: Adhere to industry averages for advertising costs. While this approach is easy to follow, markets differ, and such a strategy may lack flexibility and adaptability.
- Budget based on goals and tasks: Determine your objectives and the resources required to achieve them. While potentially the most effective and target-specific method, it can be costly and risky.
Related Terms: Marketing Budget, ROI, Digital Marketing, Ad Spend, Sales Budget.
