Budgeting

Definition

Advertising is a major expense to most organizations and deciding on and justifying the size of advertising budgets is a common challenge that all marketers face.

Marketers must justify that their spend is substantial enough to deliver on objectives, whilst ensuring that it is not wasteful over-advertising of scarce dollars that could be better used elsewhere.

Key Findings

Despite the importance of the accountability of such expenditure, there is a long-recognized paucity of evidence-based budgeting approaches
There is no single simple formula for determining the ideal advertising budget and its allocation. It is however possible to apply evidence-based knowledge about how much to spend and to systematically consider the relevant factors to guide decision-making.
Just the amount spent on advertising (irrespective of the vast number of other, qualitative factors of how the amount is spent) is related to market share performance.
Generally, for market share maintenance a brand should spend a Share of Voice equal to its Share of Market (Market Share).
Larger brands enjoy an advertising economy of scale and can get away with under-spending a little. Whereas smaller brands must over-spend, investing for growth.
Another simple guide for how much to spend on advertising is to relate it to what will maximise profit.
Profit maximizing expenditure is a function of a brand’s advertising elasticity. A brand should set their advertising budget as their gross profit multiplied by their advertising elasticity.
Evidence from meta-analysis suggests that a typical advertising elasticity is 0.10. Elasticities do, however, vary for new (higher) vs. established (lower) brands; between Europe (higher) and America (lower); fmcg (lower) vs. durables and services (higher) and of course with better performing advertising executions.

Best Practice

Combine multiple budgeting approaches (forecasts) to deliver a recommended budget.
Use evidence-based budgeting approaches, backed by research, to guide thinking about formulating your budget, and to give you empirically-based evidence to justify your budget.
Three such diverse yet complementary methods are: one that looks externally to what a brand of a given size should spend relative to competitors; another based on how much the brand can afford to spend (e.g. an internal focus on profits based on the expected uplift from advertising investment); and a third that relates to how much needs to be spent on the tasks that are needed to deliver the brand’s objectives (the assumption being the brand is looking to maintain and/or grow share).

Reports (2)

FAQ (44)

Academic Publications (2)

Theses (4)

Theses

Showing 4 results

Do brands that grow advertise differently to those that do not?

November 2020
PhD
Kelly Vaughan

Market share stationarity is the norm in established categories and developed markets with growth (or decline) clearly the exception. Nonetheless, growth targets remain common practice in business and marketing plans.
Advertising is a key scalable tool and one of the large budget items marketers have to help achieve growth. Yet there is limited generalisable evidence and knowledge to inform how much to spend on advertising and how to allocate budgets across media and time. The purpose of this study is to understand whether growing brands advertise differently to non-growing brands, with a focus specifically on advertising budgeting and media planning.

NOTE: The appendices for this Thesis are too large to post on the website. Please contact the Institute to obtain a full copy.

What happens when brands stop advertising? Documenting long-term sales trends

August 2017
Masters
Adam Gelzinis

Maintaining an advertising presence is expensive and it can be difficult to link advertising investments with financial returns to justify continued spending. Hence at times, some brands stop advertising, sometimes for long periods. This thesis addresses the question that follows: What happens to sales when a brand stops advertising?

Do brand users really pay more attention to advertising?

November 2013
Honours
Kelly Vaughan

Advertising effectiveness measures provide a tool for marketers and researchers to measure and evaluate their brand’s advertising. Researchers have found when using these measures that brand users are more likely to respond to questions about their brand’s advertising, than non-users (Harrison 2013; Rice & Bennett 1998; Romaniuk & Wight 2009). This is commonly referred to as “usage bias” and is considered an empirical generalisation, as the pattern has been observed in multiple studies (Hammer & Riebe 2006; Harrison 2013; Romaniuk & Wight 2009; Sharp, Beal & Romaniuk 2001, 2002). - This thesis is concerned with this usage bias effect and extending the empirical generalisation to new contexts of different advertising awareness measures and advertising likeability. Advertising awareness uses memory retrieval methods to identify the awareness of a commercial in a respondent’s memory.

Testing the Advertising Intensiveness Law in Budgeting

December 2007
PhD
Nicholas Danenberg

This thesis examines whether it is prudent and constructive for a manager to use their brand’s market share (specifically using the law-like Advertising Intensiveness relationship of Jones) to guide their advertising expenditure decision. Decisions regarding advertising expenditure and advertising effective- ness are really two sides of the same coin—how can one specify an amount to spend without the knowledge of what that spending will achieve? Therefore, this thesis examines the question by investigating the effectiveness of different levels of advertising expenditure.

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