How Much Should you Spend on Advertising? Budget

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Shubhi Kotiya
CxO / Board, Germany

How Much Should you Spend on Advertising? Budget

What amount is right or optimal to spend on the advertising? If we spend too little, the effect would be negligible and if we spend too much then some of the money could probably be put to better use.
Another issue is that advertising has a carryover effect that lasts beyond the current - short-term - period. Although advertising is often treated as a current expense, part of it is really an investment that slowly builds up an intangible asset called "brand equity".

There are at least 5 specific factors to consider when setting the advertising budget:
  • STAGE IN THE PLC: New products typically receive large advertising budgets to build awareness and to gain consumer trial. Established brands usually are supported with lower advertising budgets as a ratio to sales.
  • MARKET SHARE AND CONSUMER BASE: High-market-share brands usually require less advertising expenditure as a percentage of sales to maintain their share. To build share by increasing market size requires larger advertising expenditures. On a cost-per-impression basis, it is less expensive to reach consumers of a widely used brand than to reach consumers of low-share brands.
  • COMPETITION AND CLUTTER: In a market with a large number of competitors and high advertising spending, a brand must advertise more heavily to be noticed.
  • ADVERTISING FREQUENCY: The number of repetitions needed to put across the brand's message to consumers has an important impact on the advertising budget. The higher the frequency, the higher the budget. See also: Validity Effect.
  • PRODUCT SUBSTITUTABILITY: Brands in a commodity class (cigarettes, beer, soft drinks) require heavy advertising to establish a differential image. On the other hand, advertising is also important when a brand can offer certain unique physical benefits or features.
There exists special tools like the "Vidale-Wolfe advertising model" and "John Little's model" that take into account these factors to yield information on the average sales created by low, medium, and high rates of advertising that can be used to update the parameters of the sales-response function.

⇒ Can you think of any additional factor? Or can you share your experiences with applying these last 2 models… Drop a reply!

Source: Philip Kotler (2001), "Marketing Management Millenium Edition", 2001, 10th Edition, pp. 579-580

  Gandhi Heryanto
Management Consultant, Indonesia

Justifying the Advertising Budget by Estimating Future Cashflows

I believe the 5 specific factors that you describe (...)

  Jaap de Jonge
Editor, Netherlands

Justifying an Advertising Budget with NPV

@Gandhi Heryanto: Thanks for sharing this interest (...)

  Ricardo Schrappe
Director, Brazil

Attractive Advertisements Require Less Budget

The better the idea, the lesser you need to invest (...)

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