There are several models by which businesses plan their promotion costs. Not all of them are equally correct, but they are still used by businesses.
Calculating the cost of tasks
Based on the interests of the business, advertising tasks are defined for a month, quarter or year. For example, to conduct advertising campaigns in context and targeting, to make email newsletters, to order promotional products. The approximate cost of the work is determined, a small percentage may be included for unforeseen expenses. The budget plan drawn up in this way is submitted for approval.
Pros : you can clearly see what the budget will be spent on.
Cons: there are no forecasts of what results the completion of tasks should lead to, so it is unclear by what KPIs the work done should be assessed.
Advertising budget from turnover
In this case, a percentage of sales is simply allocated to advertising. The amount may be based on sales for the previous period. It may also be a share of projected sales for the future reporting period. The percentage remains unchanged, the amount changes.
Pros : the size of the advertising budget directly depends on the efficiency of the business. If advertising sells well, turnover and income grow, such advertising can and should be scaled. The possibility for this is built into the budget formation model .
Cons: in some niches, a business can sell well with ineffective advertising due to other tools. And vice versa, leads obtained from advertising may not convert due to the fault of, for example, the call center or sales department, and the responsibility for this will actually be borne by the advertising department, which will not receive funds for development.
Advertising planning and budget by competitors
This model suggests focusing on how much competitors spend on advertising. You buy lawyer contacts can simply invest as much as your closest competitors of the same scale spend on average. Another way: determine the business's share of the market and calculate the same from the total advertising budget of the market.
Pros : The advertising budget will be competitive and not too high compared to the average in the niche.
Cons: You need to know your competitors' budgets or the budget of the entire market. This requires separate research, and the accuracy of the data obtained cannot be guaranteed.
Percentage of overhead and profit
There is a practice of allocating a percentage of overhead costs to advertising, arguing that advertising is also an overhead cost. Another option is to allocate a percentage of net profit, i.e. sales revenue minus overhead costs, to advertising activity.
Pros and cons: it is difficult to identify them, since these methods of calculating the advertising budget have no basis. Advertising is not an overhead cost, since the latter is a constant value, for example, employee salaries, and the advertising budget can be scaled depending on the effectiveness of the tool. In addition, net profit does not depend on advertising, but on many factors, including overhead and other fixed costs. Therefore, this method is simply incorrect.