Advertising in today’s business world is very important, especially to increase brand awareness of a product or business. However, the costs incurred to create advertisements or produce campaigns are sometimes quite large, so careful planning is needed so that the results obtained are commensurate with the costs that have been incurred. One of the important things to do is to determine the advertising budget correctly.
But what needs to be considered and how do we determine the advertising budget that suits our business conditions? Here are the things you need to pay attention to in creating an effective advertising budget.
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What is an Advertising Budget?
Advertising budget or advertising budget is the allocation of a company’s promotional spending over a certain period of time.
It is a measure of the company’s planned expenses to achieve its marketing objectives. The advertising budget is where a company’s strategic marketing objectives and cost-benefit analysis meet in its operational plans.
Three Pillars of Creating an Effective Advertising Budget
1. Situation Analysis
Situation analysis identifies the challenges and opportunities facing the company both internally and externally. The structured analysis breaks down the company, the customers it serves, and the competition in the marketplace.
It relates socio-cultural, technological, economic, and political-regulatory trends to the company’s operations. Finally, the situation analysis establishes the framework for the development of the company’s strategic plan.
2. Segmentation, Targeting, and Positioning (STP)
Segmentation, targeting, and positioning (STP) analysis identifies potential opportunities for the organization to pursue. Segmentation is the process by which customer groups are identified. Customer groups are formed by sifting through geographic, demographic, and psychographic variables.
Targeting involves selecting the most attractive customer groups. Factors that influence how attractive a consumer group is is market size, purchasing power, or even customer loyalty. Once market segments are ordinally ranked, the most valuable will be targeted.
Positioning requires a development strategy that indulges the target market. The previously completed situation analysis provides background information for building a positioning strategy. The purpose of a positioning strategy is to ensure that the value proposition is linked to the targeted market.
A thorough STP analysis is critical in maximizing the impact of an ad campaign. In addition, it is important to formulate an efficient strategy to reduce excess costs.
3. Return on Investment
Measuring the impact of advertising campaigns on a company’s operating income is critical to understanding the relationship between advertising spending and revenue generation. A cost-benefit analysis is usually carried out to assess the net financial benefits of the project undertaken.
Discounted cost-benefit analysis estimates after-tax operating cash flows to be Net Present Value (NPV). For any given advertising spend, companies should aim to maximize the NPV of advertising spend.
Methods for Generating Advertising Budgets Common to Many Industries
1. Percentage of Sales Method
Typically, a company’s advertising budget is an allocation of a percentage of its projected revenue. Articlespringer ad spend budgeting requires an in-depth analysis of historical data to better understand the relationship between advertising and revenue.
Business-to-business or B2B companies generally spend between 2%-5% of their revenue on advertising. On the other hand, business-to-consumer or B2C companies generally spend between 5%-10% of their revenue on advertising.
2. Competitive Parity Method
The competitive parity method is a common strategy used by companies that want not to lose out. The strategy involves using competitors’ advertising spending as a benchmark for the company’s own spending.
However, budgeting the same amount of money does not guarantee the same results for the company. Therefore, the competing party method has its limitations.
3. Objective and Task Method
The objective and task method is usually used by large companies. This results in a strong correlation between advertising spend and overall marketing objectives. This method is only useful as an underlying strategic objective.
Optimizing Advertising Budget
The Dorfman-Steiner rule is an economic theory that optimizes advertising spending. The theorem states that companies can drive revenue generation through advertising spending or lowering the price of goods.
Specifically, the Dorfman-Steiner Rule states that a firm’s advertising expenditure is at its profit-maximizing equilibrium when an additional dollar of advertising generates only one additional dollar of net revenue.
The Dorfman-Steiner rule applies only to profit-maximizing monopolies.
Impact on the Income Statement
Advertising expenses are recorded as selling, general, and administrative expenses or selling, general, and administrative (SG&A). SG&A expenses have an impact on operating income, and subsequently, net income. The company’s operating sector exerts a large influence on the sales, general, and administrative costs correlation with net income.
In the fast-moving consumer goods (FMCG) sector, where products are sold in high volumes at low prices, advertising spending makes up a larger share of revenue. It is important to assess the benefits and costs of an advertising project.
After measuring the impact of a campaign, the company can then adjust its spending and budget. Ultimately, every company must budget for advertising to maximize shareholder wealth.
To make it easier to record and allocate advertising costs in your business, you need a good bookkeeping system. Avoid manual bookkeeping processes, besides being time-consuming, this process is also prone to errors that result in information bias and impact on the business decisions you make.