In order to face competition and increase sales of product, every company spend lots of amount on advertising. MNCs are leading who spend billions of rupees whereas Indian companies spend crores of rupees on advertising. So it becomes necessary to plan this spending. Money spent on advertising is an investment which helps not only to create awareness about the brand but also to increase sales and profit of the advertiser.
Methods of preparing advertising budgets are:
1. Percentage of Sales Method
This is most common method used by advertisers in preparing ad budget. In this method the advertising budget is calculated as certain fixed percentage of the sales or estimated sales. It is based on total amount of sales. For instance, the total sales of ABC Pvt. Ltd. were Rs. 20, 00,000/- in previous year. Now according to this method company decided to allocate 10% of the last year’s sales for ad budget. So the advertisement budget for the current year is Rs. 2,00,0,00/- (i.e. 10% of Rs. 20, 00,000/-..
2. Percentage of Profit Method
In this method, companies set their budget at a certain percentage of their current or forecasted profits. For instance, the profit of ABC Pvt. Ltd. is Rs.10, 00,000/- in current year. Now according to this method company decided to allocate 10% of this year’s profit for ad budget. So the advertisement budget for the current year is Rs.1,00,0,00/- (i.e. 10% of Rs.10,00,000/..
3. Unit Sale Method
This method is variation of percentage of sales method. This method is used for consumer durable products or high priced products. In this method, advertiser decides a specific amount to be allocated for advertising for each unit sold. It is based on the quantity of units sold. For instance, ABC Pvt. Ltd decided to spend Rs. 1,000/- on advertisement for each unit of car sold. The company sold 5000 units of cars in current year. So the advertisement budget for current year is Rs. 50,00,000/- (i.e. Rs.1000/- per unit X 5000 units sold..
4. Competitor Parity Method
In this method the advertising budget is estimated based on competitor’s advertisement budget allocation. It can be either equal, more or less depending on the objectives of the company. Though this method is easy but not appropriate. Because situation of competition may vary with advertiser in the sense, competitor’s objective may vary or he may have not selected proper method of preparing
ad budget.
5. Affordable Method
This is a very simple method of ad budget allocation. After all the other expenses have been taken care of the company then allocates the left over money for the advertisements. This method is also called “All you can afford”. Those companies, which follow this method, consider advertisement as expenditure. Small businesses often use this method because of lack of knowledge and poor understanding of the role of advertisements.
6. Arbitrary Method
This method is completely dependent on the management’s discretion. There is no logical or systematic thinking for ad budget allocation. The budget is decided based on the psychological and economical buildup of the management and not on the market requirements.
7. Past Experience and Intuitive
In this method, advertiser takes decisions of allocating advertising budget based on their past experience and intuition.
8. Objective and Task Method
This is the most appropriate ad budget method for any company. It is a scientific method to set
advertising budget. The method considers company’s own environment and requirement. Objectives and task method guides the manager to develop his promotional budget by:
- Defining specific objectives
- Determining the task that must be performed to achieve them,
- Estimating the costs of performing the task.
