The advertising budget of a business is typically a subset of the larger sales budget and, within that, the marketing budget. Advertising is a part of the sales and marketing effort. Money spent on advertising can also be seen as an investment in building up the business.
In order to keep the advertising budget in line with promotional and marketing goals, a business owner should start by answering several important questions:
- Who is the target consumer? Who is interested in purchasing the product or service, and what are the specific demographics of this consumer (age, employment, sex, attitudes, etc.)? Often it is useful to compose a consumer profile to give the abstract idea of a "target consumer" a face and a personality that can then be used to shape the advertising message.
- What media type will be most useful in reaching the target consumer?
- What is required to get the target consumer to purchase the product? Does the product lend itself to rational or emotional appeals? Which appeals are most likely to persuade the target consumer?
- What is the relationship between advertising expenditures and the impact of advertising campaigns on product or service purchases? In other words, how much profit is likely to be earned for each dollar spent on advertising?
Answering these questions will help to define the market conditions that are anticipated and identify specific goals the company wishes to reach with an advertising campaign. Once this analysis of the market situation is complete, a business must decide how best to budget for the task and how best to allocate budgeted funds.
There are several allocation methods used in developing a budget. The most common are listed below:
- Percentage of Sales method
- Objective and Task method
- Competitive Parity method
- Market Share method
- Unit Sales method
- All Available Funds method
- Affordable method
It is important to notice that most of these methods are often combined in any number of ways, depending on the situation. Because of this, these methods should not be seen as rigid but as building blocks that can be combined, modified, or discarded as necessary. Remember, a business must be flexible—ready to change course, goals, and philosophy when the market and the consumer demand such a change.
Percentage of Sales Method
Due to its simplicity, the percentage of sales method is the most commonly used by small businesses. When using this method an advertiser takes a percentage of either past or anticipated sales and allocates that percentage of the overall budget to advertising. But critics of this method charge that using past sales for figuring the advertising budget is too conservative, that it can stunt growth. However, it might be safer for a small business to use this method if the ownership feels that future returns cannot be safely anticipated. On the other hand, an established business, with well-established profit trends, will tend to use anticipated sales when figuring advertising expenditures. This method can be especially effective if the business compares its sales with those of the competition (if available) when figuring its budget.
Objective and Task Method
Because of the importance of objectives in business, the task and objective method is considered by many to make the most sense and is therefore used by most large businesses. The benefit of this method is that it allows the advertiser to correlate advertising expenditures with overall marketing objectives. This correlation is important because it keeps spending focused on primary business goals.
With this method, a business needs to first establish concrete marketing objectives, often articulated in the "selling proposal," and then develop complementary advertising objectives articulated in the "positioning statement." After these objectives have been established, the advertiser determines how much it will cost to meet them. Of course, fiscal realities need to be figured into this methodology as well. Some objectives (expansion of area market share by 15 percent within a year, for instance) may only be reachable through advertising expenditures beyond the capacity of a small business. In such cases, small business owners must scale down their objectives so that they reflect the financial situation under which they are operating.
Competitive Parity Method
While keeping one's own objectives in mind, it is often useful for a business to compare its advertising spending with that of its competitors. The theory here is that if a business is aware of how much its competitors are spending to advertise their products and services, the business may wish to budget a similar amount on its own advertising by way of staying competitive. Doing as one's competitor does is not, of course, always the wisest course. And matching another's advertising budget dollar for dollar does not necessarily buy one the same marketing outcome. Much depends on how that money is spent. However, gauging one's advertising budget on other participants' in the same market is a reasonable starting point.
Market Share Method
Similar to competitive parity, the market share method bases its budgeting strategy on external market trends. With this method a business equates its market share with its advertising expenditures. Critics of this method contend that companies that use market share numbers to arrive at an advertising budget are ultimately predicating their advertising on an arbitrary guideline that does not adequately reflect future goals.
Unit Sales Method
This method takes the cost of advertising an individual item and multiplies it by the number of units the business wishes to sell. This method is only effective, of course, when the cost of advertising a single unit can be reasonably determined.
All Available Funds Method
This aggressive method involves the allocation of all available profits to advertising purposes. This can be risky for a business of any size it means that no money is being used to help the business grow in other ways (purchasing new technologies, expanding the work force, etc.). Yet this aggressive approach is sometimes useful when a start-up business is trying to increase consumer awareness of its products or services. However, a business using this approach needs to make sure that its advertising strategy is an effective one and that funds which could help the business expand are not being wasted.
With this method, advertisers base their budgets on what they can afford. Of course, arriving at a conclusion about what a small business can afford in the realm of advertising is often a difficult task, one that needs to incorporate overall objectives and goals, competition, presence in the market, unit sales, sales trends, operating costs, and other factors.
Once a business decides how much money it can allocate for advertising, it must then decide where it should spend that money. Certainly the options are many, including print media (newspapers, magazines, direct mail), radio, television (ranging from 30-second ads to 30-minute infomercials), and the Internet. The mix of media that is eventually chosen to carry the business's message is really the heart of the advertising strategy.
The target consumer, the product or service being advertised, and cost are the three main factors that dictate what media vehicles are selected. Additional factors may include overall business objectives, desired geographic coverage, and availability (or lack thereof) of media options.
Kim T. Gordon, author, marketing coach and media spokesperson offers three general rules to follow when trying to select a media vehicle for advertising in an article entitled "Selecting the Best Media for Your Ad."
Rule number 1: eliminate waste. The key to selecting the right media source is to choose the source "that reaches the largest percentage of your particular target audience with the least amount of waste." Paying to reach a larger number of people may not serve well if the audience reached has only a small percentage of likely customers of your product. It may be preferable to advertise in a paper or magazine with a smaller distribution if the readers of that paper or magazine are more likely to be in the market for your product or service.
Rule number 2: follow your customer. Here again, the objective is to go to the sources used most by your target market, especially a source that that audience looks to for information about your type of product or service. Gordon explains that advertising "in search corridors—such as the Yellow Pages and other directories—is often a cost-efficient solutions. They're the media customers turn to when they've made a decision to buy something."
Rule number 3: buy enough frequency. We are constantly bombarded with advertisements and images and in order to penetrate the consciousness it is important to be seen with some frequency. Gordon emphasizes that it is "essential to advertise consistently over a protracted period of time to achieve enough frequency to drive your message home."
The timing of advertisements and the duration of an advertising campaign are two crucial factors in designing a successful campaign. There are three methods generally used by advertisers in scheduling advertising. Each is listed below with a brief explanation.
- Continuity—This type of scheduling spreads advertising at a steady level over the entire planning period (often month or year, rarely week), and is most often used when demand for a product is relatively even.
- Flighting—This type of scheduling is used when there are peaks and valleys in product demand. To match this uneven demand a stop-and-go advertising pace is used. Notice that, unlike "massed" scheduling, "flighting" continues to advertise over the entire planning period, but at different levels. Another kind of flighting is the pulse method, which is essentially tied to the pulse or quick spurts experienced in otherwise consistent purchasing trends.
- Massed—This type of scheduling places advertising only during specific periods, and is most often used when demand is seasonal, such as at Christmas or Halloween.
ADVERTISING NEGOTIATIONS AND DISCOUNTS
No matter what allocation method, media, and campaign strategy that advertisers choose, there are still ways small businesses can make their advertising as cost effective as possible. Writing in The Entrepreneur and Small Business Problem Solver, author William Cohen put together a list of "special negotiation possibilities and discounts" that can be helpful to small businesses in maximizing their advertising dollar:
- Mail order discounts—Many magazines will offer significant discounts to businesses that use mail order advertising.
- Per Inquiry deals—Television, radio, and magazines sometimes only charge advertisers for advertisements that actually lead to a response or sale.
- Frequency discounts—Some media may offer lower rates to businesses that commit to a certain amount of advertising with them.
- Stand-by rates—Some businesses will buy the right to wait for an opening in a vehicle's broadcasting schedule; this is an option that carries considerable uncertainty, for one never knows when a cancellation or other event will provide them with an opening, but this option often allows advertisers to save between 40 and 50 percent on usual rates.
- Help if necessary—Under this agreement, a mail order outfit will run an advertiser's ad until that advertiser breaks even.
- Remnants and regional editions—Regional advertising space in magazines is often unsold and can, therefore, be purchased at a reduced rate.
- Barter—Some businesses may be able to offer products and services in return for reduced advertising rates.
- Seasonal discounts—Many media reduce the cost of advertising with them during certain parts of the year.
- Spread discounts—Some magazines or newspapers may be willing to offer lower rates to advertisers who regularly purchase space for large (two to three page) advertisements.
- An in-house agency—If a business has the expertise, it can develop its own advertising agency and enjoy the discounts that other agencies receive.
- Cost discounts—Some media, especially smaller outfits, are willing to offer discounts to those businesses that pay for their advertising in cash.
Of course, small business owners must resist the temptation to choose an advertising medium only because it is cost effective. In addition to providing a good value, the medium must be able to deliver the advertiser's message to present and potential customers.
RELATIONSHIP OF ADVERTISING TO OTHER PROMOTIONAL TOOLS
Advertising is only part of a larger promotional mix that also includes publicity, sales promotion, and personal selling. When developing an advertising budget, the amount spent on these other tools needs to be considered. A promotional mix, like a media mix, is necessary to reach as much of the target audience as possible.
The choice of promotional tools depends on what the business owner is attempting to communicate to the target audience. Public relations-oriented promotions, for instance, may be more effective at building credibility within a community or market than advertising, which many people see as inherently deceptive. Sales promotion allows the business owner to target both the consumer as well as the retailer, which is often necessary for the business to get its products stocked. Personal selling allows the business owner to get immediate feedback regarding the reception of the business' product. And as Hills pointed out, personal selling allows the business owner "to collect information on competitive products, prices, and service and delivery problems."
Advertising Your Business. Small Business Administration, n.a.
Clark, Scott. "Do the Two-Step with Advertising Budget." Memphis Business Journal. March 3, 2000.
Gordon, Kim T. "Call in the Pros." Entrepreneur. December 2000.
Gordon, Kim T. "Selecting the Best Media for Your Ad." Entrepreneur. September 2003.
Pinson, Linda and Jerry Jinnett Steps to Small Business Start-Up. October 2003.
Rasmussen, Erika. "Big Advertising, Small Budget." Sales and Marketing Management. December 1999.
Silver, Jonathan. "Advertising Doesn't Have to Break Your Budget." Washington Business Journal. May 1, 1998.
Hillstrom, Northern Lights
updated by Magee, ECDI