This presentation discusses methods for determining an advertising budget. It defines the difference between an advertising appropriation, which is the total amount approved by management for advertising, and an advertising budget, which divides the appropriation into amounts for specific activities. It then describes four common budgeting methods: the percentage of sales method, objective and task method, competitive parity method, and affordability method. For each, it provides details on the approach and merits and demerits. Ultimately, it concludes that no single method is best and finding the optimum expenditure level is difficult in practice.

1. Presentation on
Advertising Budgeting:
Ad Budget, Ad Appropriation and Methods
of Budgeting
Presented by:
Ashutosh Sahu
MBA 4th Semester

2. Flow of Presentation
• Introduction
• Determination of the Advertising Appropriation
• Methods of Advertising Appropriations/Budgeting
• Conclusion

3. Introduction
• The terms ‘budget’ and ‘appropriation’ are very
often used interchangeably as if they are having the
same meaning.
• However, there is fine technical difference between
the two.
• An ‘Advertising appropriation’ is the total amount
granted or earmarked by the top management for
advertising.

4. Continued…
• On the other hand, ‘advertising budget’ is one that is
divided into amounts set aside for specific activities.
These separate figures together makeup an
advertising appropriation.
• Budgeting suggests planning the size of the
appropriation on the basis of specific advertising
objectives and the cost of attaining them.
• And, Advertising appropriation is that part of
company’s communication budget which is to be spent
or say invested on media, men and other ancillary
services so as to communicate the message to target
consumers impersonally.

5. Determination of the Advertising
Appropriation
• Determination of the appropriate advertising outlay is
essential for the development of creative media
strategies.
• Because; in a large measure, the tempo and the tenor
of the ad campaigns depend on how much is available
for advertising.
• There are several factors that form the basis for
arriving at the advertising budget and its size.

6. Continued…
• The factors are:
Objectives to be
attained
Funds available
Competitive
activities
Product class
Coverage
expectations
Approach to
advertising
Stage of the
product life-
cycle
Size of the
company
Age of the
company

7. Methods of Advertising
Appropriations/Budgeting
• Though, determining the appropriate advertising
outlay is the most difficult task even for the most
seasoned companies, several methods are developed
ranging somewhere between two to twenty-four.
• Of these, the most commonly accepted are four which
are presented here.
• These are:
– Percentage of sales method.
– Objective and task method.
– Competitive parity method.
– Affordability method.

8. Percentage of Sales Method
• It is the most widely used method of appropriation
though it has declined in its importance.
• There are several variations in the actual application
of this method. The percentage may be based on last
year’s sales or on the estimated sales for the coming
period or the combination of the two.
• Under the method, the advertising funds required are
equal to rupee sales multiplied by the expected
percentage.

9. Continued…
• For instance, if the estimated sales are rupees 10
million and the expected percentage is 3, then the
funds earmarked will be of the order of rupees 0.30
million.
• The merits of this method are:
– (a) It is simple.
– (b) It works on affordability.
– (c) It is consistent.
• The demerits are:
– (a) Wrong stressing.
– (b) Static in approach.
– (c) Ignores long-range planning.

10. Objective and Task Method
• This method is gaining ground because, it directs the
attention to the objectives to be attained by the
marketing programme.
• The role that the advertising is to play in attaining
such objectives and works on the fact that advertising
plays vital role in stimulating demand and is not the
result of sales.
• It decides the appropriation of advertising funds on
the basis of the objectives to be achieved and the
tasks involved therein.

11. Continued…
• This method involves three steps:
– (a) Defining the objectives in quantitative terms.
– (b) Outlining the tasks to achieve the goals so set.
– (c) Estimating the cost of performing these tasks so
outlined.
• The merits of this method are:
– (a) It is more objective.
– (b) It is review based.
– (c) It is individualistic.
• The demerits are:
– (a) It is irrelevant.
– (b) Difficulty of converting objectives into tasks.
– (c) It is unscientific.

12. Competitive Parity Method
• In essence, this method consists of setting the
appropriation by relating it to the expenditure pattern
of the major competitor or competitors.
• It is a matter of matching the annual expenditure of the
competitor or an attempt to maintain the same set of
relationship between the expenditures of the firm and
that of a competitor.
• In other cases, this method may involve the use of
average percentage so the sales spent by the firms in
the entire industry and then applying that percentage to
the firm’s sales to arrive at the appropriations.

13. Continued…
• For this purpose, the company must collect relevant,
up-to-date and authentic data about competitor’s
appropriations in terms of sales, ratios, percentages of
advertising costs and sales.
• The merits of this method are:
– (a) It respects the superiors.
– (b) It kills competitive wars.
– (c) It is simple.
• The demerits are:
– (a) It is not logical.
– (b) It is a misfit.
– (c) It encourages competitive wars.

14. Affordability method
• What a company can afford to spend is more important
than what it thinks in terms of wonderful ambitious
plan of advertising.
• Here, the company thinks in terms of its ability to
spend depending on the prevailing business conditions
and the resources at its command.
• This means that the advertising appropriation is
possible only when the other more important and
urgent needs is met.
• Under the method, the advertising expenditure is
related to either the company profits or the assets.

15. Continued…
• Thus, the management may decide say, 15 per cent of
its profits or 5 per cent of its liquid assets for ad
programme for the proposed period.
• The merits of this method are:
– (a) It is practical.
– (b) It is simple.
– (c) It is flexible.
• The demerits are:
– (a) It overlooks opportunities.
– (b) It is short-sighted.
– (c) It ignores the ability of advertising.

16. Conclusion
• From the above slides it is crystal clear that each
method has its own theme and merits and demerits.
• None of these methods says about ‘optimum’
advertising expenditure that a firm should attempt and
get on.
• The economic principle says that the advertising
budget should be raised to that level where the last
rupee spent on advertising just pays for itself in
additional profit.
• In actual practice, it is not that easy to locate this
optimum point.