Plan Your Advertising Budget
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Promotional Ideas
Summary
Deciding how much your advertising
should cost - just how much should be invested in making sales grow
- and how that amount should be allocated is completely up to you,
the small business owner-manager.
Advertising costs are a completely controllable expense. Advertising
budgets are the means of determining and controlling this expense
and dividing it wisely among departments, lines or services.
This publication describes various methods (percentage of sales or
profits, units of sales, objective and task) for intelligently
establishing an advertising budget and suggests ways of applying
budget amounts to get the effect you want.
If you want to build sales, it's almost certain you'll need to
advertise. How much should you spend? How should you allocate your
advertising dollars? How can you be sure your advertising outlays
aren't out of line? The advertising budget helps you determine how
much you have to spend and helps establish the guidelines for how
you're going to spend it.
What you'd like to invest in advertising and what you can afford are
seldom the same. Spending too much is obviously an extravagance, but
spending too little can be just as bad in terms of lost sales and
diminished visibility. Costs must be tied to results. You must be
prepared to evaluate your goals and assess your capabilities - a
budget will help you do precisely this.
Your budget will help you choose and assess the amount of
advertising and its timing. It will also serve as the background for
next year's plan.
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Methods of Establishing a Budget
Each of the various ways in which to establish an advertising budget
has its problems as well as its benefits. No method is perfect for
all types of businesses, nor for that matter is any combination of
methods.
Here, concepts from several traditional methods of budgeting have
been combined into three basic methods: percentage of sales or
profits; unit of sales; and objective and task. You'll need to use
judgement and caution in settling on any method or methods.
Percentage of Sales or Profits
The most widely used method of establishing an advertising budget is
to base it on a percentage of sales. Advertising is as much a
business expense as, say, the cost of labor and, thus, should be
related to the quantity of goods sold.
The percentage-of-sales method avoids some of the problems that
result from using profits as a base. For instance, if profits in a
period are low, it might not be the fault of sale or advertising.
But if you stick with the same percentage figure, you'll
automatically reduce your advertising allotment. There's no way
around it: two percent of $10 000 is less than two percent of $15
000.
Such a cut in the advertising budget, if profits are down for other
reasons, may very well lead to further losses in sales and profits.
This in turn will lead to further reductions in advertising
investment, and so on.
In the short run a small business owner might make small additions
to profit by cutting advertising expenses, but such a policy could
lead to a long term deterioration of the bottom line. By using the
percentage-of-sales method, you keep your advertising in a
consistent relation to your sales volume - which is what your
advertising should be primarily affecting. Gross margin, especially
over the long run, should also show an increase, of course, if your
advertising outlays are being properly applied.
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What percentage?
You can guide your choice of a percentage-of-sales figure by finding
out what other businesses in your line are doing. These percentages
are fairly consistent within a given category of business.
It's fairly easy to find out this ratio of advertising expense to
sales in your line. Check trade magazines and associations. You can
also find these percentages in statistics reports and in reports
published by financial institutions such as Dun & Bradstreet, NCR
Business Ratio, etc.
Knowing what the ratio for your industry is will help to assure you
that you will be spending proportionately as much or more than your
competitors; but remember, these industry averages are not gospel.
Your particular situation may dictate that you want to advertise
more than or less than your competition. Average may not be good
enough for you. You may want to out-advertise your competitors and
be willing to cut into short term profits to do so. Growth takes
investment.
No business owner should let any method bind him or her. It's
helpful to use the percentage-of-sales method because it's quick and
easy. It ensures that your advertising budget isn't way out of
proportion for your business. It's a sound method for stable
markets. But if you want to expand your market share, you'll
probably need to use a larger percentage of sales than the industry
average.
What sales?
Your budget can be determined as a percentage of past sales, of
estimated future sales, or as a combination of the two:
Past sales.
Your base can be last year's sales or an average of a number of
years in the immediate past. Consider, though, that changes in
economic conditions can make your figure too high or too low.
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Estimated future sales.
You can calculate your advertising budget as a percentage of your
anticipated sales for next year. The most common pitfall of this
method is an optimistic assumption that your business will continue
to grow. You must keep general business trends always in mind,
especially if there's the chance of a slump, and hardheadedly assess
the directions in your industry and your own operation.
Past sales and estimated future sales.
The middle ground between an often conservative appraisal based on
last year's sales and a usually too optimistic assessment of next
year's is to combine both. It's a more realistic method during
periods of changing economic conditions. It allows you to analyze
trends and results thoughtfully and to predict with a little more
assurance of accuracy.
Unit of Sales
In the unit-of-sale method you set aside a fixed sum for each unit
of product to be sold, based on your experience and trade knowledge
of how much advertising it takes to sell each unit. This is, if it
takes two cents' worth of advertising to sell a case of canned
vegetables and you want to move 100 000 cases, you'll probably plan
to spend $2 000 on advertising them. Does it cost X dollars to sell
a refrigerator? Then you'll probably have to budget 1 000 time X if
you plan to sell a thousand refrigerators. You're simply basing your
budget on unit of sale rather than dollar amounts of sales.
Some people consider this method just a variation of
percentage-of-sales. Unit-of-sales does, however, probably let you
make a closer estimate of what you should plan to spend for maximum
effect, since it's based on what experience tells you it takes to
sell an actual unit, rather than an overall percentage of your gross
sales estimate.
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The unit-of-sales method is particularly useful in fields where the
amount of product available is limited by outside factors, such as
the weather's effect on crops. If that's the situation for your
business, you first estimate how many units or cases will be
available to you. Then, you advertise only as much as experience
tells you it takes to sell them. Thus, if you have a pretty good
idea ahead of time how many units will be available, you should have
minimal waste in your advertising costs.
This method is also suited for specialty goods, such as washing
machines and automobiles; however, it's difficult to apply when you
have many different kinds of products to advertise and must divide
your advertising among these products. The unit-of-sales method is
not very useful in sporadic or irregular markets or for style
merchandise.
Objective and Task
The most difficult (and least used) method for determining an
advertising budget is the objective-and-task approach. Yet, it's the
most accurate and best accomplishes what all budgets should:
It relates the appropriation to the marketing task to be
accomplished.
It relates the advertising appropriation under usual conditions and
in the long run to the volume of sales, so that profits and reserves
will not be drained.
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To establish your budget by this method, you need a coordinated
marketing program with specific objectives based on a thorough
survey of your markets and their potential.
While the percentage-of-sales or profits method first determines how
much you'll spend without much consideration of what you want to
accomplish, the task method establishes what you must do in order to
meet your objectives. Only then do you calculate its cost.
You should set specific objectives: not just "Increase sales", but,
for example, "Sell 25 percent more of product X or service Y by
attracting the business of teenagers". Then determine what media
best reaches your target market and estimate how much it will cost
to run the number and types of advertisements you think it'll take
to get that sales increase. You repeat this process for each of your
objectives. When you total these costs, you have your projected
budget.
Of course, you may find that you can't afford to advertise as you'd
like to. It's a good idea, therefore, to rank your objectives. As
with the other methods, be prepared to change your plan to reflect
reality and to fit the resources you have available.
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How to Allocate Your Budget?
Once you have determined your advertising budget, you must decide
how you'll allocate your advertising dollars.
First, you'll have to decide if you'll do any institutional
advertising or only promotional advertising.
After you set aside an amount to build your image (if that's your
plans for the year), you can then allocate your promotional
advertising in a number of ways. Among the most common breakdowns
are:
Departmental Budgets
The most common method of allocating advertising dollars is percent
of sales. Those departments or product categories with the greatest
sales volume receive the biggest share of the budget.
In a small business or when the merchandise range is limited, the
same percentage can be used throughout. Otherwise, a good rule is to
use the average industry figure for each product.
By breaking down the budget by departments or products those goods
that require more promotion to stimulate sales can get the required
advertising dollars. Your budget can be further divided into
individual merchandise lines.
Total Budget
Your total budget may be the result of integrated departmental or
product budgets. If your business has set an upper limit for
advertising expense percentage, then your departmental budgets,
which are based on different percentages of sales in each area,
might be pared down.
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In smaller businesses the total budget may be the only one
established. It, too, should be divided into merchandise
classifications for scheduling.
Calendar Periods
Most executives of small businesses usually plan their advertising
on a monthly, even a weekly, basis. Your budget, even if it's for a
longer planning period, ought to be calculated for these shorter
periods. It will give you better control.
The percentage-of-sales methods is also useful here to determine how
much money to allocate by time periods. The standard practice is to
match sales with advertising dollars. Thus, if February accounts for
5 percent of your sales, you might give it 5 percent of your budget.
Sometimes you might want to adjust advertising allocations downward
in some of your heavier sales months, so you can boost the budget of
some of your poorer periods. But this should be done only if you
have reason (as when you competition's sales trends differ markedly
from yours) to believe that a change in your advertising timing
could improve slow sales.
Media
The amount of advertising that you place in each advertising medium
- such as direct mail, newspapers, or radio - should be determined
by past experience, industry practice, and ideas from media
specialists. Normally it's wise to use the same sort of media your
competitors use. That's where, most likely, your potential customers
look and listen.
Sales Areas
You can spend your advertising dollars where your customers already
come from, or you can use them to try to stimulate new sales areas.
Just as in dividing your appropriation by time periods, it's wise to
continue to do the bulk of your advertising in familiar areas.
Usually it's more costly to develop new markets than to maintain
established ones.
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A Flexible Budget
Any combination of these methods may be employed in the formation
and allocation of your advertising budget. All of them - or simply
one - may be needed to meet your advertising objectives. However,
when you decide to plan your budget, you must make it flexible,
capable of being adjusted to changes in the marketplace.
The duration of your planning and budgeting period depends upon the
nature of your business. If you can use short budgeting periods,
you'll find that your advertising can be more flexible and that you
can change tactics to meet immediate trends.
To ensure advertising flexibility, you should have a contingency
fund to deal with special circumstances - such as the introduction
of a new product, specials available in local media, or unexpected
competitive situations.
Beware of your competitors' activities at all times. Don't blindly
copy your competitors, but analyze how their actions may affect your
business - and be prepared to act.
Getting Started
Your first budget will be the most difficult to develop - but it
will be worth the effort. The budget will help you analyze the
results of your advertising. By your next business year you'll have
a more factual basis for budgeting than you did before. Your plans
will become more effective with each budget you develop.
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