What Is 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.

Key Takeaways

  • An advertising budget is the amount of money set aside for purposes of marketing and advertisements.
  • The cost of advertising dollars must be weighed against the potential recognized revenues that those dollars will generate.
  • Demographic research and customer segmentation can create profiles to help optimize the returns to advertising spending.

Understanding 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 problems and on providing solutions to these issues, not company problems such as an overstock reduction.

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

  • The target consumer — Knowing the consumer and having their demographic profile can help guide advertising spend.
  • Best media type 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.

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

Advertising Budget Levels

Companies can determine their advertising budget levels in several different ways, each of which has its 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.