Kerimova C.V., Financial University under the Government of Russian Federation

Advertising budget: methodic of forming and development

Advertising plan – is a document that defines the order of the promotional activities of the advertising campaign for a certain period of time.

In accordance with the classical canons of the organization of the advertising business, advertising project financing is usually planned and implemented on the basis of a special advertising budget. In most cases it is a component of the budget to promote the advertised product (advertising is just one of the main promotional-means). And in each case the size of funds for advertising will be determined in accordance with certain rules.

Classification of the advertising budget can be carried out by a number of reasons.

There are short-term, medium and long-term projects, divided in terms of time. There are combined (for all brands of organization) and split (for each brand) projects, classified by moving objects.

The process of planning an advertising budget can be divided into two areas:

1. determination of the total funds for advertising;

2. distribution and control of budget expenditure items.

There are three main methods for determining the advertising budget:

· correction method;

· the method of finite challenges;

· interest method.

The correction method. The method concludes determining the advertising budget on the basis of previous experience in financing campaigns. Generally accepted as the fundamental principle of the value of spending on advertising products, comparable in their baseline characteristics (purpose, cost, quality, etc.) with the products, that we are going to advertise now. The projected cost of advertising includes a number of correction factors:

· inflation, that raises the general level of prices for goods and services;

· the initial cost: we consider the relative size of the cost of development and creation of advertising project in past periods or by our competitors;

· information that takes into account the relative duration of the campaign and related expenses for the dissemination of advertisements for a certain number of channels among a certain audience.

As a result, the value of the advertising budget (AB₁) can be determined by the formula:

AB₁ = AB₀ * K_i * K_ic * K_inf,

where AB₀ – the size of the budget the previous campaign;

K_i - the inflation rate;

K_ic - the coefficient of initial costs;

K_inf - the information ratio.

The correction method can quickly determine the average value of future advertising costs. But for a more accurate calculation it is better to use two other methods for determining the advertising budget.

The method of finite problems. This method involves the calculation of funds for advertising, depending on purposes, objectives and aims, that open up the mission to the upcoming campaign. It is the most often used method in case if company is not limited in money. In practice, this method of calculation is reduced to a careful definition of articles of basic and additional costs conceived advertising, the size of the establishment costs for each of them (taking into account the actual prevailing conditions of the advertising campaign) and the summation of the past with the addition to the final result the reserve of 5-10% for future expenses.

As a rule, the main items of expenditure in this case include:

• organizational expenses (E_org);

• research expenses (E_rea);

• development costs of advertising (E_dev);

• the cost of creating advertising (E_crea);

• the cost of dissemination of advertising (E_dis).

Planning and establishing of these costs takes into account the specific objectives of the forthcoming campaign, and features of its implementation.

Thus, the value of the advertising budget (AB₁) can be calculated as:

AB₁ = E_org + E_dev + E_crea + E_dis + E_add + E_res,

where E_add - the amount of additional costs;

E_res - reserve funds.

Interest method. This method is used especially in cases if funds allotted to advertising are strictly limited.

The basis of calculation is the determination of the advertising budget as a percentage of expected sales. In a sense, this method is a combination of the methods previously described, cause in the determination of initial values we use data from previous campaigns (eg, an acceptable proportion of the costs, the size of the earlier profits and gains), and we add to the calculated value reserve and back-up funds.

The calculations are carried out in three stages:

I. We calculate the average percentage (proportion) of the cost of advertising campaign to the size of our distribution:

AP = AC : TS,

where AP - the average percentage of the cost of the upcoming advertising, %;

AC - the size of the average cost of advertising campaigns in the past with comparable terms and conditions;

TS - the total sales of advertised products.

II. According to the projected sales of our products (goods and services) we estimate a minimum size of the new advertising budget (AB_min):

AB_min = PS * AP,

where PS - Projected sales.

III. We add the value of reserve and back-up funds to the minimal size of the new advertising budget. As a result, the value of the advertising budget is defined as:

AB₁ = AB_min + E_res.