Customer Service: Creating an ad budget in a tough economy could help with growth

Advertising is just as important as rent, taxes and payroll. Companies must set up a sustainable advertising budget-it’s no longer an optional, extra expense to be cut altogether when money is tight. When developing a business budget to include advertising, there are a number of variables to consider: advertising objectives, market trends and, of course, how much the business can realistically afford to invest. But many have said spending too little on advertising will cost you significantly more than spending too much. There are several strategies businesses may employ to determine the ideal budgeting strategy.

Probably the worst strategy some businesses use is the “residual method.” This method calls for spending only what money is left after all other expenditures. Because of the lack of budgeting, lots of money is wasted in a great year and in a bad year, there is no investment to boost sales. Remember that advertising is an investment, not an expense. This method is too simplistic and too uncommitted to yield positive results, and it does not allow for proper planning to achieve specific advertising objectives for the year.

Another method is “share of market/share of voice.” This method is based on external market trends, linking market share to ad spending. Because it uses the ever-changing, arbitrary guidelines of market share numbers, this strategy does not reflect achievable marketing goals for the year and may result in either wasted ad dollars or not enough invested to meet advertising needs.

Then there is the “competitive parity” strategy. In this method, companies try to spend about the same as competitors. It is often called a “self-defense” style of budgeting. It may work with predictably selling, well-established products, but it is often based on the questionable assumption that there is an “industry average” that works well for all. This strategy also erroneously assumes that competitors have similar advertising objectives to meet. Worse, what if the competitors are doing it all wrong and you are matching their failed advertising budget? Rather than relying entirely on the “we should be doing what they’re doing” method, consider focusing on your own customers and company objectives when determining the advertising budget. This may call for spending more or less than the competition to edge out an advantage.

One slightly better strategy is the “percentage of sales method.” This method typically calculates the advertising budget based on current or desired sales. It works OK in a market with stable, predictable sales patterns, and it helps avoid ad wars. But if the budget is set to actual sales and sales drop, the advertising budget drops at the time the business needs it most-it can stunt growth and sales. An established business with reliable profit trends will likely use desired sales when determining the budget using this method.

One budgeting tactic that is historically very effective is the “task-objective method.” This strategy sets forth very specific short- and long-term goals to achieve in the advertising campaign, such as “increase sales 15 percent in the first quarter” or “generate 200 new inquiries in six months.” Then, the amount of money necessary to achieve those goals is determined, and the budget develops from there based on the series of objectives and tasks. This method allows the advertiser to directly correlate ad dollars spent with marketing objectives when measuring results and modifying the plan to enhance the campaign’s effectiveness.

Whatever the resulting budget may be, it is important to sustain an advertising campaign to build recognition, trust and sales. Remember that advertising is only a part of the promotional mix, which also includes publicity, sales promotion and personal selling. Advertising is not a wham-bam, immediate results kind of purchase, though. It is an investment that takes time to show real return. It must be carefully planned from the initial objective, through the campaign development, all the way to final media placement and measurement of results.

There are no hard, fast rules in advertising, especially when it comes to budgeting. Rather than relying on one method alone, companies should use a tailored combination of the best budget strategies to allocate funds for their advertising campaigns. Above all, make sure your budget is flexible so it can be adjusted according to any changes in the market or competitor action. For the best results, seek the help of seasoned pros with plenty of experience in the world of advertising. Advertising agencies specialize in establishing the ideal objectives for a fiscal year, specific ways to achieve them and the best budget plans to do so. In our next column, we will discuss how to allocate advertising dollars to make the most of your money.  v

Lili Vianello is President of Visionworks Marketing & Communications, a Columbia-based full service advertising, marketing and public relations firm offering media planning and placement. Contributions to this article were made by Visionworks staff members. Visit them online at www.visionworks.com.