Some budget items can be assessed in terms of requirements quite precisely, or output; advertising expenses, on the other hand, have a very high degree of randomness.
In some cases, the investment output can be predicted with a good safety margin: for example, the ROI of an e-commerce campaign. Advertising activities as a whole, however, are a much broader set: they include investments in brand awareness, or channels that are not easily traceable, and in general it is not easy to evaluate the results a priori.
Furthermore, it is advisable to allocate budgets of different amounts depending on the stage of the company's life, its commercial objectives or the target market, understood both as the type of public to be reached and the behavior of the competition.
However, there are some consolidated methodologies that can provide a solid starting point for establishing the advertising budget; each company will choose which one to adopt based on its specificities and will identify its own specific method that will consist of a mix of two-three of the methods outlined below.
Method #1, or percentage of sales
The first method, probably the one most often used by SMEs, consists in allocating to advertising a certain fixed percentage of the revenues budgeted for the current year (or, with a more conservative approach, of the revenues of the previous year).
It is a simple and safe system because the company does not expose itself too much financially.
As the company grows, the sums allocated to advertising will grow proportionally, thus accompanying the development of the company.
However, this system is mostly suitable for mature businesses; when dealing with new businesses or companies that want to work on ambitious market expansion plans it becomes limiting (or too random when calculations are made on budget values).
Method no. 2, or the objective to be achieved
The goal-to-achieve method is also a rational system, although a little more complex in application. In this case, the budget to invest is chosen based on the marketing goal you want to achieve.
In other words, let's answer these questions:
How much do I need to spend to achieve a certain increase in sales volume?
How much does it cost, in monetary terms, to increase the average receipt of shoppers by X?
And so on, depending on the desired goal.
The main limitation of this method is obvious: to know the cost/results ratio with a sufficiently good approximation, it is necessary to be able to draw on a well-nourished data set.
This method therefore becomes applicable either to large companies, which are able to support very complex market and internal data analyses, or at least to companies that can refer to a consolidated history.
And, of course, it might not make sense if there is too much turbulence in the market, and the last few years have shown us that it can come much more easily than we think.
Despite these limitations, in those cases where there is sufficient data to give appropriate estimates, the method of the objective to be achieved is certainly among the most valid and appreciated. It also allows to highlight when an objective is too ambitious in relation to the financial resources of the company.
Method No. 3, or Competitive Parity
The two previous methods took as their main reference the company and its internal dynamics: what level of revenue it has achieved, or what objectives it would like to achieve.
If we look outside, one of the first things I notice is that my advertising will have to compete with that of my competitors. That's why, in theory, I should spend at least as much as them if I want to at least maintain my market share, and not let their greater commercial aggressiveness end up eroding my revenues!
