How much should you spend on advertising?

It is a well known fact that advertising is a must for any business to initially be launched/established, then to grow, and also to be sustainable in the long run.

There are many forms of advertising, and it is important to decide what type of advertising is best for your brand. This decision needs to be taken considering the brands’ audience, the nature of the brand and the expected returns of the campaign.

In any form of advertising, a question that all marketers need to answer is “how much should I/we spend on this advertising campaign?”

Here are some methods of setting advertising budgets.

• Setting aside a fixed percentage of  revenue

Many companies resort to this method of budgeting, which involves making a management decision on what percentage of the company’s revenue will be allotted for advertising every year and then use this.

Although this method maybe easy to understand and gives perspective to your spend with respect to the earnings, it is not that successful in a unpredictable situation. It may result in losing opportunities to capitalize on sudden shifts in consumption patterns etc, or could result in an undue spending of funds for not-so-lucrative campaigns  simply because they were set aside at the start of the year.

• Mirror against Competition

Another popular method of setting advertising budgets is to look at the industry/competition. A brief audit on the rough spends of competitors on advertising and the returns they are seen to be obtaining is a good method of deciding budgets. This method is also directly linked to returns. However, the returns of advertising  also depend on the brand and setting budgets according to competition/industry averages may not guarantee the same results for your organisation.

Another disadvantage of this method is that like in the above method, companies may miss out on opportunities to boost market share by rigidly sticking to a particular figure.

• Focus on Objectives

One of the best methods of setting a budget is to go back to your objectives. How much you should spend depends greatly on where you want to be. For example, if one of your objectives is, “Increase social media presence by having 10,000 likes on the company’s Facebook page”, your budget for advertising should be aligned with getting to that 10,000 figure.

However, this might not be the most cost-effective method for setting budgets  since it only focusses on the results, and may cause over spending. Moreover, if the campaign is not successful, the amount of money lost would definitely higher if budgeting is done using this method.

• Setting aside the maximum

Another common method of setting budgets is to set aside the maximum the company needs for the sustenance of the business, and use the balance for advertising and promotions. This method may not be very successful as the value allocated for advertising may be way over or under the appropriate amount, leading to severe over/under spending.

To above budgeting methods can be summarised using the table below.

Budgeting Method	Pros	Cons
Setting aside a fixed percentage of  revenue	This method is easy to understand It is safe and controls over spending to a great extent	Basing the budget on past performance may result in you losing the opportunity to capitalize on sudden positive market changes This method is based on the assumption that sales are directly a result on advertising, which is not always true
Mirror against Competition	Another “easy to understand” method, provided the sales patterns are predictable	Industry averages may not apply to all businesses in the marketplace Here too, companies may miss opportunities to capitalize and increase market share if they stick rigidly to budget figures
Focus on Objectives	Accurate method since it ties the spend to what you want to accomplish	If the campaign turns out to be unsuccessful, the money lost may be very high using this method
Setting aside the maximum	Since the investment made is higher, it will most likely offer faster growth	This method is associated with a lot of risk, since you’re using up the businesses reserves for advertising. Improper management may even result in having to close shop.

When considering the pros and cons of all the above methods, the most appropriate method seems to be “Focussing on Objectives”, since it is strictly results-oriented. Proper management of the risk factor may reduce the risk associated with the project.

Created: November 18th, 2013