How Much Should you Spend on Advertising? Budget

Rating

How Much Should you Spend on Advertising? Budget

What amount is right or optimal to spend on the advertising? If we spend too little, the effect would be negligible and if we spend too much then some of the money could probably be put to better use.
Another issue is that advertising has a carryover effect that lasts beyond the current - short-term - period. Although advertising is often treated as a current expense, part of it is really an investment that slowly builds up an intangible asset called "brand equity".

FACTORS TO DETERMINE THE ADVERTISING BUDGET
There are at least 5 specific factors to consider when setting the advertising budget:

• STAGE IN THE PLC: New products typically receive large advertising budgets to build awareness and to gain consumer trial. Established brands usually are supported with lower advertising budgets as a ratio to sales.
• MARKET SHARE AND CONSUMER BASE: High-market-share brands usually require less advertising expenditure as a percentage of sales to maintain their share. To build share by increasing market size requires larger advertising expenditures. On a cost-per-impression basis, it is less expensive to reach consumers of a widely used brand than to reach consumers of low-share brands.
• COMPETITION AND CLUTTER: In a market with a large number of competitors and high advertising spending, a brand must advertise more heavily to be noticed.
• ADVERTISING FREQUENCY: The number of repetitions needed to put across the brand's message to consumers has an important impact on the advertising budget. The higher the frequency, the higher the budget. See also: Validity Effect.
• PRODUCT SUBSTITUTABILITY: Brands in a commodity class (cigarettes, beer, soft drinks) require heavy advertising to establish a differential image. On the other hand, advertising is also important when a brand can offer certain unique physical benefits or features.

There exists special tools like the "Vidale-Wolfe advertising model" and "John Little's model" that take into account these factors to yield information on the average sales created by low, medium, and high rates of advertising that can be used to update the parameters of the sales-response function.

⇒ Can you think of any additional factor? Or can you share your experiences with applying these last 2 models… Drop a reply!

Source: Philip Kotler (2001), "Marketing Management Millenium Edition", 2001, 10th Edition, pp. 579-580

		Comments by date▼ Comments by rating Rating
		1 Gandhi Heryanto Management Consultant, Indonesia
	Justifying the Advertising Budget by Estimating Future Cashflows I believe the 5 specific factors that you describe already cover everything that is commonly considered for making an advertising budget. Usually we take one or several factors with more specific assumptions to decide what we are going to target. For example, the price of the product we want to advertise, the target consumer's income. The advertising budget must be in line with the value of those factors to be able to change the tastes and preferences of consumers and thus increase the demand. In addition to the two tool models you mentioned, Vidale-Wolfe and John Little's model, there is another model that assumes advertising as an investment like machinery and equipment: the Nerlove and Arrow model (Nerlove and Arrow (1962), "Optimal advertising policy under dynamic conditions", Economica, pp. 129-142). They calculate the Net Present Value of the advertising spending and the future revenue stream resulted from the advertising effect. In this way you can determine a budget if you have (estimate) its NPV.

		1 Jaap de Jonge Editor, Netherlands
	Justifying an Advertising Budget with NPV @Gandhi Heryanto: Thanks for sharing this interesting build for this topic. An NPV approach will be suitable if the future cashflows can be estimated with enough confidence resulting from a given initial investment (=the advertising budget). This could be the case with click-through types of internet advertising, etc. An issue with such approach is however that the extra, strategic benefits of advertising like brand support, corporate reputation, etc. can't be expressed in monetary terms. For example in case of a corporate image TV-campaign. However you could still calculate an NPV for the immediate results of such corporate image program and mention the strategic benefits separately.

		0 Ricardo Schrappe Director, Brazil
	Attractive Advertisements Require Less Budget The better the idea, the lesser you need to invest in advertising. Today, if your ad or message is boring, you'll have to pay more in order to get it through. And you will probably upset your public for being invasive. If the idea is fresh, creative, relevant and powerful, it may engage a larger public and earn a lot of media attention.