There are different approaches that may be used when budgeting for a company's advertisements. Budgeting advertisements into your expenditures will help increase profit margin, and product loyalty.
The reason for being in business in the first place is to make money. But you need to spend money where it counts to make money.
Marginal Analysis Marketing Budgeting
Marginal analysis uses a graph to show profits, and monies spent on advertising in the fiscal year, or can be divided up into quarters. As promotional expenditures increase, gross margins also increase. At some point the gross margin will level off.
Profits are a result of the gross margin minus the advertising cost. Using this budgeting technique, the company spends money on advertising as long as the marginal revenues created by money spent on the advertisements themselves, exceed the actual price of the ads.
The optimum results of this budget would be for the amount spent on advertising to equal the revenue created by the advertising in the first place. Marginal analysis is an easy way to track monies spent and money made and their relationship to one another.
If the profit goes up, you have more money to spend on advertising, but if it goes down you can scale back the budget as well.
And, there are two different types of marketers. There are the creative marketers who are more interested in the advertising aspect and how they can make cool ads, etc.
They want to see which creative ads make the most money. Then there are the marketers who are all about the numbers. If you are all about the numbers then marginal analysis will probably work best for you
Sales Response Models
After studying the effects of advertising on sales the conclusion is that as the amount of advertising increases, its incremental value decreases. The consumers with the most potential to buy will buy in the beginning when the deal is new. The consumers who are not likely to buy will not change due to the advertising and the profit margin will taper off. The sales response models represent the amount you spend on advertising and its correlation to the income created by the advertising in the first place.
The models are either shaped in a concave-downward motion representing the profits quickly diminishing, meaning that less advertising dollars are needed for optimal sales.
The next is the response curve, which looks like an S. This shape shows that as your advertising budget increases, so does your profits, but in a delayed manner.
This method of budgeting is better for those creative types who can interpret the graphs better than just looking at numbers.
It is much easier to see which advertising campaigns are successful because the graphs easily show your correlations.
Your budget
You can choose to budget in whichever way you feel suites your company best. You may put as much money as you wish into advertising, and keep track of the results in your own way. Or, you can choose one of these.
Action Steps For Marketing Budgeting
1. Choose a budget style.
2. Allocate funds for advertising.
3. Keep up with profits on a budget chart or spreadsheet.
Important Points About Marketing Budgeting
- Budgeting is the best way to keep track of spending and income.
- The more money you spend on advertising the more you will potentially make.
- Choose your own way to budget and to keep track of the progress.
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