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).