What Is an Advertising Budget

An advertising budget is an estimate of a company's promotional expenditures over a certain time period. More importantly, it is the money a company is willing to set aside to accomplish its marketing objectives. When creating an advertising budget, a company must weigh the value of spending an advertising dollar against the value of that dollar as recognized revenue.

The best advertising budgets—and campaigns—focus on customers' needs and solving their problems, not company problems such as an overstock reduction.

Understanding an Advertising Budget

An advertising budget is part of a company's overall sales or marketing budget that can be viewed as an investment in a company's growth. The best advertising budgets—and campaigns—focus on customers' needs and solving their problems, not company problems such as an overstock reduction.

Special Considerations: Advertising Budget and Goals

Before deciding on a specific advertising budget, companies should make certain determinations to ensure that the budget is in line with their promotional and marketing goals:

  • Target consumer: Knowing the consumer and having their demographic profile can help guide advertising spend.
  • Type of media that is best for the target consumer: Mobile or internet advertising—via social media—may be the answer, although traditional media, such as print, television, and radio may be best for a given product, market, or target consumer.
  • Right approach for the target consumer: Depending on the product or service, consider if appealing to the consumer's emotions or intelligence is a suitable strategy.
  • Expected profit from each dollar of advertising spending: This may be the most important question to answer, as well as the most difficult.

Advertising Budgets: How Much Is Enough?

Companies can determine the level to set their advertising budget in 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. Allocate 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% to 5% of annual revenues on advertising. This strategy is 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 sufficiently flexible.
  4. Budget based on goals and tasks: This strategy, wherein you determine the objectives and the resources needed to achieve them, has pros and cons. 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.

Key Takeaways

  • An advertising budget is an estimate of a company's promotional expenditures over a certain time period.
  • When creating an advertising budget, a company must weigh the value of spending an advertising dollar against the value of that dollar as recognized revenue.
  • Knowing the consumer and having their demographic profile can help guide advertising spend.