How to Allocate a Budget for Advertising: Key Approaches

Starting an advertising campaign is quite a complex process that requires much planning and a lot of decisions to be made before it’s up and running. One of the fundamental things about running an ad campaign is allocating the advertising budget and then distributing the funds between different media channels. This is the first post in the series tackling these issues, which is going to help you answer the question: “How do I decide how much to spend on advertising?” So, read on!

This is the first post in the series tackling these issues, which is going to help you answer the question: “How do I decide how much to spend on advertising?” So, read on!

Allocating a budget for advertising

There exist numerous ways to decide how much money a business is going to spend for advertising. Usually, this budget is a part of a marketing budget and it is quite logical that it should be in line with a company’s marketing and revenue goals. Therefore, it is considered not effective to allocate for advertising only the funds left after all other business expenses have been taken care of.

The most common approaches used by most businesses are as follows:

1. Based on the projected sales revenue

In a nutshell, a business decides what percentage of the future sales revenue can be set aside for advertising. In other words, if a company is planning to receive $100,000 in the coming year, and is ready to spend 7% of this amount for its ad campaign, their budget is going to be $7,000.

The popularity of this method is due to its numerous advantages, like:

  • ease of implementation and calculation,
  • encouraging the management to see the correlation between the promotion expenses, selling price and profit per unit.
  • keeping the advertising spending within limits
  • works for small businesses

However, there are certain disadvantages connected with this approach:

  • it is unsuitable for new products, especially those that have no counterparts on the market
  • a decrease in sales can lead to decrease in the advertising budget, but more promo may be a better solution in this case.

2. Based on the cost of a sale of a product

This approach resembles the previous one and basically means that an arbitrary amount from the selling price of a product is spent for advertising. So, in case a business is ready to spend $5 to promote a sale of a product that costs $100, then they can spend $5,000 in advertising to sell 1000 products and, respectively, receive $100,000 in sales.

As to how to decide on that amount of money per unit, well, it differs in different industries, countries and business environments. Your competitors’ campaigns can be a hint here.


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