Each of the many ways in which to establish an advertising budget has its problems as well as its benefits. No method is perfect for all types of businesses, nor for that matter is any combination of methods. The following are the most usual methods in use today.

Percentage of sales or profits

The most widely used method of establishing an advertising budget is to base it on a percentage of sales. Advertising is a legitimate business expense and should be related to the quantity of goods sold.

It’s helpful to use the percentage-of-sales method because it’s quick and easy. It ensures that your advertising budget isn’t way out of proportion for your business. It’s a sound method for stable markets. But if you want to expand your market share, you’ll probably need to use a larger percentage of sales than the industry average.

The percentage-of-sales method avoids some of the problems that result from using profits as a base. For instance, if profits in a period are low, it might not be the fault of sale or advertising. But if you stick with the same percentage figure, you’ll automatically reduce your advertising allotment. In the short run a small business owner might make small additions to profit by cutting advertising expenses, but such a policy could lead to a long term deterioration of the bottom line.

By using the percentage-of-sales method, you keep your advertising in a consistent relation to your sales volume - which is what your advertising should be primarily affecting. Gross margin, especially over the long run, should also show an increase, of course, if your advertising outlays are being properly applied.

What percentage should you use? You can guide your choice of a percentage-of-sales figure by finding out what other firms in your line of business are doing. These percentages are fairly consistent within a given category of business.

Unit of sales

In the unit-of-sales method you set aside a fixed sum for each unit of product to be sold, based on your experience and trade knowledge of how much advertising it takes to sell each unit. Thus, if it takes two cents’ worth of advertising to sell a case of canned vegetables and you want to move 100,000 cases, you’ll probably plan to spend $2,000 on advertising them. You’re simply basing your budget on unit of sale rather than dollar amounts of sales.

Unit-of-sales probably lets you make a closer estimate of what you should plan to spend for maximum effect, since it’s based on what experience tells you it takes to sell an actual unit, rather than an overall percentage of your gross sales estimate.

Objective and task

The most difficult (and least used) method for determining an advertising budget is the objective-and-task approach. Yet, it’s the most accurate and best accomplishes what all budgets should:

• It relates the appropriation to the marketing task to be accomplished.
• It relates the advertising appropriation under usual conditions and in the long run to the volume of sales, so that profits and reserves will not be drained.

To establish your budget by this method, you need a coordinated marketing program with specific objectives based on a thorough survey of your markets and their potential.

Purchasing stream

The budget for advertising to attract new customers is often based on expected total income - called a purchasing stream - from your new customer.

A purchasing stream is the total gross volume of new business you can realistically expect to generate from an advertising effort. For example a grocer might attract a new customer who will spend $125/week for six years. That’s a $39,000 customer.

So, your budget would be derived as a percentage of that number.