MARKETING TIPS

by Ken Mitchell

8 February 2002

One of the most difficult decisions in planning the years activities is knowing how much the annual advertising budget will cost. There are several ways to do this task.

Percentage of sales method is the traditional and most commonly used method. The businesses allocates a fixed percentage amount, usually between 5% and 10% of projected annual revenue. Irrespective of how big they grow they still allocate the budget on a fixed percentage basis. The percentage can vary significantly company to company and industry to industry.

Arbitary allocation is for the “flying by seat of the pants” manager to just state an amount based on his/her personal judgement – ie pluck a figure out of the air with or without research or other sound backing other than the managers’ intuitive judgement. The manager is usually in the best position to know how much the business can afford and this is made clear right from the start, a very simple method and a commonly used method. This is often achieved by simply adding a small percentage to last years allocation.

Competitive parity method is where managers research their main competitors advertising expenditure and market share and then allocate the amount of budget necessary to achieve their market share goal.

The all affordable method is the amount of money left over for advertising when you take the expected revenue data and subtract all production and operations costs and thereby allocate all that is left over to advertising.

The objective task method is the method of the future and all businesses should consider this. Ask your media provider/advertising agency how much it will cost to achieve a specific result for a specific campaign then commit that amount. The profits from each campaign can be reinvested into the next campaign and so on from strength to strength. A relatively new trend in America for very large campaigns is for agencies to be held to account with guarantees of effectiveness with payment levels (with penalties and bonuses) based on results achieved.

What is important is that you have a method of allocating the budget annually in advance. It is usually a good start to review at least 2 of the above methods then settle on the method and budget that best suits your business.

Ken Mitchell is the CEO of Australian Marketing & Research Services and can be contacted on 62576677w, or kenmitch@austarmetro.com.au

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