Advrtising Budget Objective and Task

The most difficult (and least used) method for determining an advertising budget is the objective-and-task approach. Yet, it's the most accurate and best accomplishes what all budgets should:

It relates the appropriation to the marketing task to be accomplished.

It relates the advertising appropriation under usual conditions and in the long run to the volume of sales, so that profits and reserves will not be drained.

To establish your budget by this method, you need a coordinated marketing program with specific objectives based on a thorough survey of your markets and their potential.

While the percentage-of-sales or profits method first determines how much you'll spend without much consideration of what you want to accomplish, the task method establishes what you must do in order to meet your objectives. Only then do you calculate its cost.

You should set specific objectives: not just "Increase sales," but, for example, "Sell 25% more of product X or service Y by attracting the business of teenagers." Then determine what media best reaches your target market and estimate how much it will cost to run the number and types of advertisement you think it'll take to get that sales increase. You repeat this process for each of your objectives. When you total these costs, you have your projected budget.

Of course, you may find that you can't afford to advertise as you'd like to. It's a good idea, therefore, to rank your objectives. As with the other methods, be prepared to change your plan to reflect reality and to fit the resources you have available.

How to Allocate Your Advertising Budget

Once you have determined your advertising budget, you must decide how you'll allocate your advertising dollars. First, you'll have to decide if you'll do any institutional advertising or only promotional advertising.

After you set aside an amount to build your image (if that's your plans for the year), you can then allocate your promotional advertising in a number of ways. Among the most common breakdowns are by:

1) departmental budgets

2) total budget

3) calendar periods

4) media

5) sales areas

Departmental Budgets

The most common method of allocating advertising dollars is percent of sales. Those departments or product categories with the greatest sales volume receive the biggest share of the budget.

In a small business or when the merchandise range is limited, the same percentage can be used throughout. Otherwise, a good rule is to use the average industry figure for each product.

By breaking down the budget by departments or products those goods that require more promotion to stimulate sales can get the required advertising dollars. Your budget can be further divided into individual merchandise lines.

Total Budget

Your total budget may be the result of integrated departmental or product budgets. If your business has set an upper limit for advertising expense percentage, then your departmental budgets, which are based on different percentages of sales in each area, might be pared down.

In smaller business the total budget may be the only one established. it too, should be divided into merchandise classification for scheduling.

Calendar Periods

Most executives of small businesses usually plan their advertising on a monthly, even a weekly, basis. Your budget, even if it's for a longer planning period, ought to be calculated for these shorter periods. It will give you better control.

The percentage-of-sales methods is also useful here to determine how much money to allocate by time periods. The standard practice is to match sales with advertising dollars. Thus, if February accounts for 5% of your sales, you might give it 5% of your budget.

Sometimes you might want to adjust advertising allocations downward in some of your heavier sales months, so you can boost the budget of some of your poorer periods. But this should be done only if you have reason (as when your competition's sales trends differ markedly from yours) to believe that a change in your advertising timing could improve slow sales.

Media

The amount of advertising that you place in each advertising medium - such as direct mail, newspapers, or radio - should be determined by past experience, industry practice, and ideas from media specialists. Normally it's wise to use the same sort of media your competitors use. That's where, most likely, your potential customers look and listen.

Sales areas

You can spend your advertising dollars where your customers already come from, or you can use them to try to stimulate new sales areas. Just as in dividing your appropriation by time periods, it's wise to continue to do the bulk of your advertising in familiar areas. Usually it's more costly to develop new markets than to maintain established ones.

A Flexible Advertising Budget

Any combination of these methods may be employed in the formation and allocation of your advertising budget. All of them - or simply one - may be needed to meet your advertising objectives. However you decide to plan your budget, you must make it flexible, capable of being adjusted to changes in the marketplace.

The duration of your planning and budgeting period depends upon the nature of your business. If you can use short budgeting periods, you'll find that your advertising can be more flexible and that you can change tactics to meet immediate trends.

To ensure advertising flexibility, you should have a contingency fund to deal with special circumstances - such as the introduction of a new product, specials available in local media, or unexpected competitive situations.

Beware of your competitor's activities at all times. Don't blindly copy your competitors, but analyze how their actions may affect your business - and be prepared to act.

Getting Started

Your first budget will be the most difficult to develop - but it will be worth the effort. The budget will help you analyze the results of your advertising. By your next business year you'll have a more factual basis for budgeting than you did before. Your plans will become more effective with each budget you develop.

Prior to opening your Company you must decide upon the general Cost Amount you expect to keep. Will you appeal to people buying in
the high, medium, or low budget? Your choice of location, appearance of your institution, quality of goods handled, and solutions
to be provided will all depend on the customers you would like to attract, and so will your prices.

After establishing this overall price level, You're ready to price Individual items. Generally, the purchase price of an item has
to cover the cost of the product, all other expenses, and a profit. Therefore, you will have to markup the item by a certain
amount to cover costs and earn a profit. In a business that sells few things, total costs can readily be allocated to each item
and a markup immediately ascertained. With a variety of things, allocating costs and determining markup may need an accountant. In
retail operations, products tend to be marked up by 50 to 100 per cent or more simply to make a 5 percent to 10% profit!

Let's work through a markup illustration. Suppose your company sells 1 product, Product A. The supplier sells Product A for you
for $5.00 each. You and your accountant determine the prices involved in selling Product A are $4.00 per item, and you desire a $1
per item gain. What is your markup? Well, the selling price is: $5 plus $4 and $1 or $10; the markup therefore is $5. As a
percentage, it is 100%. So you have to markup Merchandise A by 100% to produce a 10% gain!

Many small business managers are interested in knowing what Industry markup standards are for various products. Wholesalers,
distributors, trade institutions and business research firms publish a massive variety of such ratios and business statistics.
They are useful as recommendations. Another ratio (in addition to the markup percentage) important to small businesses is your
Gross Margin Percentage.

The GMP is similar to your markup percent but whereas markup Identifies the percent over the price to you of each item you have to
set the selling price so as to cover the other expenses and earn profits, the GMP shows the association between sales revenues
minus the expense of the product, which is your gross profit margin, along with your earnings earnings. What the GMP is telling
you is that your markup bears a certain relationship to your sales revenues. The markup percent and the GMP are basically the
exact same formula, with the markup speaking to individual product pricing and GMP referring to the item costs times the amount of
items sold (volume).

Maybe an illustration will clarify the purpose. Your firm sells Product Z. It costs you .70 each and you choose to sell it for $1
each to cover costs and gain. Your markup is 43%. Now let up state you sold 10,000 Merchandise Z's Last month hence producing
$10,000 in earnings. Your cost to purchase Product Z was $7000; your gross profit margin was $3,000 (earnings minus cost of
products sold). This is also your gross markup for your month's volume. Your GMP will be 30%. Both of these percentages utilize
the exact same primary numbers, differing just in division. Both are utilized to set up a pricing method. And both are published
and may be used as guidelines for smaller businesses beginning out. Often managers determine what Gross Margin Percentage they'll
need to make a profit and just go to some printed Markup Table to find the percentage markup that correlates with that margin
requirement.

While this discussion of pricing might seem, in certain respects, to Be directed just to the pricing of retail merchandise it can
be applied to other types of companies as well. For solutions the markup has to pay for administrative and selling costs in
addition to the immediate cost of performing a particular service. If you are manufacturing a product, the costs of direct labor,
materials and supplies, components purchased from other issues, special tools and equipment, plant overhead, administrative and
selling expenses have to be carefully estimated. To calculate a cost per unit requires an estimate of the amount of components you
plan to produce. Before your mill gets too large it would be smart to consult an accountant about a cost accounting system.

Not all things are marked up by the average markup. Luxury articles Will take more, staples . For example, increased sales volume
by a lower-than-average markup on a certain thing - a"loss leader" - may bring a higher gross profit unless the purchase price is
reduced too much. Then the consequent increase in earnings won't raise the entire gross profit enough to compensate for the low
cost.

Sometimes you may wish to sell a certain item or service at a lower Markup so as to increase store traffic with the expectation of
increasing sales of Regularly priced merchandise or generating a large number of new support contracts. Competitors' prices will
also regulate your prices. You cannot sell a Product if your competition is greatly underselling you. These and other Factors Can
make you vary your markup among items and solutions. There's no magic Formula which will work on every item or every service all
the time. However, You ought to remember the general average markup which you want to generate a Gain.

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