The problem of determining the advertising budget is familiar to everyone who deals with marketing communications. And the difficulty is sometimes not only to “knock out” this budget.
Much more important – to determine its exact size. How much does it take to spend on advertising to achieve the set goals? How should media expenses correlate with competitors’ profits and expenses? Unfortunately, it’s not uncommon for companies to act at random, allocating money on the principle of “how much is left” or “not less than others,” thus including in the race of budgets. Both approaches ultimately lead to sad consequences. So how do you properly calculate the budget for advertising? This will be the subject of our article.
For more than fifteen years, communicating with clients, I often face the problem of forming an advertising budget. Often, even experienced managers approach this important issue haphazardly, not taking into account many trends and changes in the media market.
To begin to analyze the principles of building an advertising budget, you need to identify the main factors that influence this process:
1. Product lifecycle
Introducing a new product to the market requires significant advertising costs, often exceeding the profit from its sale over a long period. Obviously: for a buyer to learn about a product, select it from among competitors and make a trial purchase, serious investment is needed. At the same time, the risk of failure here is maximum.
After passing this stage, the decision is made on the choice of further marketing strategy – or move forward, building up
sales volume and advertising budget, or to defend a captured market segment, which requires less cost.
2. Market
Before defining the advertising budget it is necessary to clearly represent your market – its volume, quality and territory. It is clear that it makes no sense to go to the national media if the main sales are concentrated in three or four cities. In this case, it makes more sense to focus on local advertising.
Going to the federal media (first of all – TV) is worth it only when the number of states of interest to us exceeds 15. Of course, this indicator can vary greatly depending on the specific areas and selected channels of communication, but always remember: in any national campaign will be wasted some money.
3. Competition
Another important factor in market analysis is competition. A clear understanding of competitors’ actions, their “pros” and “cons”, knowledge of their costs and the effectiveness of their campaigns are necessary components of successful media activity. Before the beginning of an advertising campaign of your product it is very useful to have information on cost shares (SOS – Share of Spends) and ratings (SOV – Share of Voice) of your competitors. Sometimes it is better not to launch a new brand and promote it immediately than to waste money. At the same time, the more unique the product is, the more consumer benefits it has and the more interesting creative solutions in packaging and advertising (use beautiful and free mockups), the more chances to succeed even in the conditions of fierce competition.
4. Profitability
Indicator of the profitability of the product is one of the most important conditions affecting the size of the advertising budget. With a minimum profitability, it is only possible to spend serious money on promotion with large sales volumes. Conversely, brands with high and very high added value can be advertised with relatively small sales, while the allocation of funds for promotion is logically fit into the strategy of brand development, and the risk of failure is much less than in the first case.
5. Finance
It is not a secret that large multinational companies, through the redistribution of financial resources between product areas, can afford a long and active product advertising, working “in the zero” or “in the minus”. The main thing is the prospect, gaining market share, getting loyal customers.
In the absence of the necessary financial resources, the most acceptable strategy I see as a gradual increase in advertising costs associated with increased sales volume.
The most dangerous thing is to be included in the “race of budgets”, as in this case, strong competitors will start to pressure an increase in advertising costs and encourage unreasonable expenses.