How do I determine the ad budget? Here’s the full discussion

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How do I determine the ad budget Heres the full discussion

How do I determine the ad budget? Here’s the full discussion

How do I determine the ad budget Heres the full discussion

Advertising in the current business world is very important, Teautama to improve brand awareness of a product or business. But the costs incurred to make ads or produce campaigns are sometimes quite large so that planning is needed so that the results obtained are proportional to the costs incurred. One of the important things done is to determine the ad budget correctly.

But what needs to be considered and how to determine the ad budget that matches the condition of our business? Here are the things you need to pay attention to make an effective advertising budget.

What is a budget ad?

Advertising budget or advertising budget is the allocation of company promotion expenditure for a certain period.

This is the size of the planned expenditure of the company to achieve marketing goals. The advertising budget is the destination for the company’s strategic marketing and cost-benefit analysis meet in its operational plan.

Three pillars in making effective advertising budgets

1. Situation analysis

The situation analysis identifies the challenges and opportunities faced by companies both internally and externally. The structured analysis breaks the company, customer served, and competition in the market.

It connects social-cultural, technology, economic and political-regulatory trends with company operations. Finally, the analysis of the situation establishes a framework for the development of the company’s strategic plan.

2. Segmentation, Target, and Positioning (STP)

Segmentation, Target, and Positioning Analysis (STP) identify potential opportunities to be chased by the organization. Segmentation is a process in which customer groups are identified. The customer group is formed by sorting out geographical, demographic, and psychographic variables.

Targeting involves the selection of the most interesting customer group. The factors that influence how interesting a group of consumers are the size of the market, purchasing power, or even customer loyalty. Once the market segment is ranked originally, the most value will be targeted.

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Position determination requires a development strategy that spoils the target market. The analysis of the situation has previously provided background information to build positioning strategies. The purpose of the positioning strategy is to ensure that the value proposition is connected to the targeted market.

A comprehensive STP analysis is very important in maximizing the impact of advertising campaigns. In addition, it is important to formulate efficient strategies to reduce excessive costs.

3. Investment refund

Measuring the impact of advertising campaigns on company operating income is very important to understand the relationship between advertising expenditure and income acquisition. Cost-benefit analysis is usually done to assess the clean financial benefits of the project carried out.

Discount cost-benefit analysis estimates the operating cash flow after the tax becomes Net Present Value (NPV). For each particular advertising expenditure, the company must aim to maximize the NPV of advertising expenses.

The method in making advertising budget common from many industries

1. Sales Percentage Method

Usually, the company’s advertising budget is the percentage allocation of projected income. An accurate advertising spending budget requires a deep historical data analysis to better understand the relationship between advertising and income.

Business-to-business or B2B companies generally spend between 2% -5% of their income on advertising. On the other hand, business-to-consumer or B2C companies generally spend between 5% -10% of their income on advertising.

2. Competitive parity method

The competitive parity method is a general strategy used by companies that want to be unlikely to compete. The strategy involves the use of competing for advertising shopping as a benchmark for its company expenditure.

However, budgeting the same amount of money does not guarantee the same results for the company. Therefore, competing party methods have limitations.

3. Objective method and task

The objective method and task are usually used by large companies. This produces a strong correlation between advertising expenses and overall marketing goals. This method is only useful as the underlying strategic goal.

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Dorfman-Steiner rules are economic theory that optimizes advertising expenses. The theorem states that companies can encourage income through advertising expenditure or decrease in goods prices.

In particular, the rules of Dorfman-Steiner stated that the company’s advertising expenditure was in the equilibrium of the gain maximized when one additional dollar from advertising only produced an additional dollar from net income.

Dorfman-Steiner rules only apply to monopoly companies that maximize profits.

Impact on income statements

Ad loads are recorded as sales, general, and administrative or selling, general, and administrative costs (SG & A). SG & A expenses have an impact on operating income, and subsequently, net income. The company’s operating sector has a major influence on sales, general, and correlation of administrative costs with net income.

In the fast-moving consumer goods sector (FMCG), where products are sold in high volumes at low prices, advertising expenses are a larger part of income. It is important to assess the benefits and costs of advertising projects.

After measuring the impact of the campaign, the company can then adjust its expenses and budget. In the end, every company must budget ads to maximize the wealth of shareholders.

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