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This article describes the process of developing and forming a company’s advertising budget in detail. You will find out not only which steps are needed to begin planning advertising investment, but also see examples of the best methods for calculating the size of a company’s marketing expenditure.
After reading this material, you will be able to calculate the marketing budget needed to promote your products or services from scratch, even if you are doing it for the first time.
THREE RULES
The advertising budget should be fully justified. Otherwise, you will simply waste the company’s limited resources. There are “3 golden rules of advertising investment” that will help you approach the planning of a company’s marketing budget wisely.
Rule number 1: Assess the company’s financial capabilities.
Before you forecast the advertising budget, you need to assess the company’s maximum capacity for investment.
To do this, estimate the level of income for each month of the year. The estimate is similar to a “rough” sales forecast based on available statistics. In other words, using the company’s historical sales data, plan how much the company will sell next year, taking seasonality into account.
If sales vary from 15,000 to 40,000 euros, it is better to use the minimum value – 15,000 euros – for budget planning. The next step is to determine the company’s expenses for each month of the year.
These may include the cost of materials, staff salaries, rent, tax payments, etc.
Important: do not overestimate; try to make the most reliable assessment, preferably of the minimum level of income.
Table 1: Calculating the possible level of advertising investment.
The result of the first two steps is an estimate of the company’s future profit that can be invested in future growth. Now identify all your business priorities for next year, in other words, the key sources of growth and business opportunities. Marketing is only one area for future investment. The priority at the moment may be to upgrade equipment, to direct all resources into developing new technologies, or to train staff.
Rule number 2: Assess the critical areas of support.
Once the limits of the marketing budget are defined, you can proceed to the next planning stage: identifying the products that need to be developed through advertising and marketing activities. The basic principles that will help identify priority areas:We should support only a quality product in which all critical flaws have been eliminated. Otherwise, all investment in building product awareness will only increase negative feedback from the target audience;
– We should support a product that the target consumer has access to. Advertising a product that the customer cannot buy is pointless;
– Products at the introduction or growth stage need a higher level of investment. Products in the decline stage require minimal support and, above all, an update;
– Products in fast-growing, profitable segments need a higher level of investment. Products in stagnant markets need minimal support;
– Advertising a product with a strong competitive advantage is more effective than supporting a product without distinctive characteristics.
(Example) Assessing where to invest the marketing and advertising budget:
Table 2: Evaluation of critical areas of marketing support.
The business lines in this table are the company’s products: specific product lines, key new product launches, support for top “locomotive” products, and strengthening the competitiveness of certain goods or services.
Rule number 3: Determine the purpose of advertising support.
After identifying the key areas for investment, it is vital to set goals to support the selected areas of the business. We will look at an example of goal setting in a future article: How to set and manage marketing goals in a company correctly.
WHAT MARKETING EXPENSES ARE INCLUDED IN THE BUDGET?
Before calculating the advertising budget, let us clarify its structure. In practice, there are five main items of marketing expenditure:
“Direct advertising”: this section includes the cost of the actual placement of product advertising on TV, on the radio, in the press, in print or outdoor advertising.
“Production”: this section includes the costs of producing and creating promotional materials. For example, the production of commercials, print advertising posters, advertising layouts for magazines, payments for influencer marketing, etc.
World practice: the “production” section should not exceed 10% of the total advertising budget.
“Internet”: given the massive growth in the Internet’s importance for the effectiveness of marketing communications, it is customary to treat this item of expenditure separately. It includes the cost of creating and promoting the website, content creation, social media promotion, website hosting and maintenance, and contextual advertising.
“Auxiliary materials”: this section includes the production of small items for marketing activities: brochures, leaflets, catalogues for customers, catalogues for sales staff, branded pens and envelopes.
“Trade marketing”: this section of the budget covers marketing expenses for promotions aimed at end users and promotions for resellers, as well as the production of POS materials and retail equipment.
An example of what an advertising budget might look like, broken down by main section:
STEP-BY-STEP INSTRUCTIONS FOR CREATING A BUDGET.
So now we have all the information we need to finalise our document. Namely: – We know the maximum amount the company is prepared to invest in supporting the product;- We know which of the company’s main products need advertising support;- We know what goals we want to achieve for each product;- We know what form the budget should take. Now it is time to calculate the company’s total advertising budget for the next year.The budget development process is as follows:
The costs of marketing programmes are calculated separately for each area, then combined into a single advertising budget and optimised according to the importance of each project. Knowing the goals the company plans to achieve for each product, we can choose the most appropriate communication channels, the so-called media mix.
The next step is to determine the level of advertising pressure, which is characterised by the following indicators: the period and duration of support, the frequency of exposure and the target reach of the advertising message. The budget for each advertising campaign is calculated according to the values of these indicators. After combining the budgets of all advertising campaigns, we get a preliminary budget figure, which must be adjusted according to the following principles:
– Do not exceed the maximum investment amount calculated at the very beginning;
– Reflect the company’s key priorities: there should be no situation in which a large share of investment goes to the company’s lowest-priority projects;
– The payback of each advertising campaign should be clear (of course, large companies can sometimes afford investments that take several years to pay off, but for a small business the payback of an advertising campaign should be within one year, ideally no more than 6 months).
ALTERNATIVE METHODS OF CALCULATING THE ADVERTISING BUDGET.
The method of developing an advertising budget described above is called the “objective-based method of setting a marketing budget”; it is the most common method and is used by all the leading companies in the market.In practice, there are four more ways to determine a marketing budget:
– Gross sales percentage;
– Based on historical data;
– Competitive parity;
– The ratio of “share of voice” and market share.
Percentage of gross sales.
The essence of the method is as follows: the company’s advertising budget equals a certain percentage of its turnover over a fixed period. The budget can be calculated as a percentage of annual sales, of sales for any reporting period (quarter, month), or of sales of goods during the campaign period only. This percentage is called the advertising-to-sales ratio and is determined by the company’s expert assessment. In world practice, there are benchmarks for this indicator in the main sectors:
– Automotive industry: less than 1%;
– Retail: 2.5%;
– Business services industry: 3.5%;
– New business development (start-ups): 5–7%;
– Consumer goods markets (FMCG): 8–10%;
– Pharmaceuticals: 20%.
Determining the budget based on historical data
The method uses accumulated experience to predict the effectiveness of future advertising campaigns. Knowing the effect of a similar advertising campaign in the past, we can make an accurate sales forecast and calculate the marketing budget. It is one of the lowest-risk methods, as it is based on the company’s own experience.
The most difficult part of this approach is systematising the available information about the campaigns: the campaign period, the competitive environment during the campaign, the brand, the type of advertising message (educational campaign, information about a new product attribute, image building, etc.), the complexity of the advertising message, product novelty, etc.
The method is not suitable for completely new products and launches; it is also difficult to use when the competitive environment in the market changes significantly.
The method based on the ratio of market share to share of voice.
This approach is based on the proven relationship between an advertising campaign’s “share of voice” and the product’s market share in the industry. It allows us to determine what advertising pressure must be planned to achieve the product’s target market share.
The method of competitive parity.
The method is based on a competitive analysis of the market share and advertising costs of key competitors:
– Calculate the ratio of advertising costs to market share for key competitors;
– Determine the target market share for the supported product at the end of the support period;
– Using the competitors’ ratio, calculate the budget for supporting the company’s products.
Limitations of the method: there is a lack of open information about competitors’ costs; when using parity with competitors, it is necessary to benchmark against successful ones; it does not take into account the possibility of cost optimisation (by optimising costs, the goals set may perhaps be achieved with lower investment, improving the company’s competitiveness in the segment); and it does not take into account differences in the quality of advertising messages.
IMPORTANT:
The marketing advertising budget is the annual amount of investment to support the company’s products, documented with a monthly breakdown by specific investment items. It is compiled once a year as part of annual strategic planning and is an integral part of the marketing plan.
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