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MBA Notes - Advertising Budget Decisions

Question - What is Advertising Budget? Discuss approaches and procedure for determining the size of advertising budget.

In this advertising world, everyday we see many advertisement of different products or brands. Organisations invests heavily in advertising to make their product popular and to increase sales. But, here the question is - how the organisations decide - how much to advertise? How much to invest in advertisement? What should be the size of advertising budget?

Definition of Advertising Budget
"Advertising budget is an estimated amount an organisation decides to invest in its promotional expenditures over a period of time. An advertising budget is the money a company set aside to accomplish its marketing objectives."

It is difficult to measure the effect of advertising on business sales. Advertising is just one of the variables that affects sales in a period of time. As a percentage of sales, advertising expenditure varies from business to business. Because of such complications it is very difficult for business organisations to decide the size of advertising budget. There are various approaches that can be used to set advertising budget.

Approaches to Develop Advertising Budget
  1. Percentage of Sales Budget
  2. Competitive Parity Approach
  3. Objective and Task Approach
  4. All Organisation can Afford Approach
  5. Market Share Approach
  6. All Available Fund Approach
  7. Managerial Judgement Approach
Percentage of Sales Budget
According to this approach the business organisation have to set their advertising spending at a fixed percentage of either past or anticipated sales. This Approach can be followed by organisations operating in markets with stable and predictable sales pattern. As it is simple in application, it is most commonly used by small business organisations.

This approach has some disadvantages, as sales is not directly related to advertising, it get affected by different variables too.

Competitive Parity Approach
This approach is followed by organisations whose product is well established and operating in market with  predictable sales pattern. Organisations following this approach compare their advertising spending with that of its competitors. As the organisation is aware of how much its competitors are spending in advertising, it can logically decide its advertising budget either equal, more, or less to that of the competitors.

Here considering competitors advertising budget organisation should consider its objectives too, as the competitors objectives may not be similar or comparable.

Objectives and Task Approach
This approach is followed by big organisations having well defined marketing objectives, and business goals. Following this approach advertiser can correlate its advertising spending to marketing objectives. In long term this correlation is important to keep organisational spending focused on business goals.

All organisation can afford approach
It is difficult for small business organisations to invest heavily in advertising. Small business organisation's advertising spending depends more on their affordability. According to this approach advertisers base their advertising budget on what they can afford.

Market Share Approach
Similar to competitive parity approach, the market share approach bases its advertising spending on external market trends. With this method a business equates its market share with its advertising expenditures.

All Available Fund Approach
According to this approach all available profit is used in advertising spending. It can be too risky for any size of organisation as the all available fund is used in advertising and no fund is allocated to help business grow in other ways like- technology up-gradation, or work force development. This approach is useful for new business organisations trying to develop its brand.

Managerial Judgement Approach
In long run managers gain expertise in their field of operation. Similarly, some of the marketing managers working over the years develops a feel for the market that permits them to arrive at appropriate decisions. According to this approach the organisations advertising spending depends on the judgement of experienced managers.

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