What is an Advertising Budget

An advertising budget is estimate of a company's promotional expenditures over a certain period of time. More pertinently, it is the money a company is willing to set aside to accomplish its marketing objectives. When creating the advertising budget, a company must weigh the trade-offs between spending one additional advertising dollar with the amount of revenue that dollar will bring in as revenue.

Breaking Down Advertising Budget

An advertising budget is a part of a company's overall sales and/or marketing budget. Budgeting for advertising can be viewed as an investment in a company's growth. The best advertising budgets (and campaigns) focus on the customer's needs and solving their problems, not as a solution to the company's problems (an overstock reduction, for example).

Advertising Budget and Goals

Before deciding on a specific advertising budget companies should ask several questions to ensure that the budget is in line with its promotional and marketing goals.

  • Which consumer is the target?: Knowing the consumer and having their demographic profile can help guide advertising spend.
  • What kind of media is best for that target consumer?: More than ever, mobile or internet advertising (via social media) may be the answer, thought traditional media, such as print, television and radio may be best for a given product, market or target consumer.
  • What is the right approach for the target consumer?: Depending on the product or service, should you appeal to the consumer's emotions or intelligence?
  • How much profit can be expected from each dollar of advertising spend?: This may be the most important question to answer, as well as the most difficult.

Advertising Budget: How Much is Enough?

Companies can determine what level to set their advertising budget several different ways, each of which has its own positives and negatives.

  1. Spend as much as possible: This strategy, which sets aside just enough money to fund operations, is popular with startups that see a positive return on investment on their advertising spend. The key is anticipating when the strategy will start showing diminishing returns and knowing when to switch strategies.
  2. A percentage of sales: This is as simple as allocating a specific percentage based on the previous year's total gross sales or average sales. It is common for a business to spend 2-5% of annual revenues on advertising. This strategy simple and safe, but is based on past performance and may not be the most flexible choice for a changing marketplace. It also assumes that sales are directly linked to advertising.
  3. Spend what the competition spends: This is as simple as adhering to the industry average for advertising costs. Of course, no market is exactly the same and such a strategy may not be flexible enough.
  4. Budget based on goals and tasks: Decide on objectives and then the resources needed to achieve them. On the upside, this can be the most targeted method of budgeting and the most effective. On the downside it can be expensive and risky.