Author: Jim Riley Last updated: Sunday 23 September, 2012
A famous comment usually attributed to Lord Leverhulme goes:
“I know that half
of my advertising budget is wasted, but I’m not sure which half”
It is notoriously difficult to measure the effect of advertising on a business’
sales. Advertising is just one of the variables that might affect sales in
a particular period. These include:
• Consumer and business confidence
• Levels of disposable income
• Availability of product (e.g. does the retailer actually have stock
• Availability of competing products
• The weather (often blamed by retailers for poor sales!)
How can a business know whether a specific advertising campaign was effective?
As a percentage of sales, advertising expenditure varies enormously from
business to business, from market to market. For example, the leading pharmaceutical
companies spend around 20% of sales on advertising, whilst business such as
Ford and Toyota spend less than 1%. An average for fast-moving consumer goods
markets (“FMCG”) is around 8-10% of sales.
In practice, the following approaches are used for setting the advertising
Approaches to setting the advertising budget
Method (1) Fixed percentage of sales
In markets with a stable, predictable sales pattern, some companies set their
advertising spend consistently at a fixed percentage of sales. This policy
has the advantage of avoiding an “advertising war” which could
be bad news for profits.
However, there are some disadvantages with this approach. This approach assumes
that sales are directly related to advertising. Clearly this will not entirely
be the case, since other elements of the promotional mix will also affect
sales. If the rule is applied when sales are declining, the result will be
a reduction in advertising just when greater sales promotion is required!
Method (2) Same level as competitors
This approach has widespread use when products are well-established with
predictable sales patterns. It is based on the assumption that there is an
“industry average” spend that works well for all major players
in a market.
A major problem with this approach (in addition to the disadvantages set
out for the example above) is that it encourages businesses to ignore the
effectiveness of their advertising spend – it makes them “lazy”.
It could also prevent a business with competitive advantages from increasing
market share by spending more than average.
Method (3) Task
The task approach involves setting marketing objectives based on the “tasks”
that the advertising has to complete.
These tasks could be financial in nature (e.g. achieve a certain increase
in sales, profits) or related to the marketing activity that is generated
by the campaigns. For example:
• Numbers of enquiries received quoting the source code on the advertisement
• Increase in customer recognition / awareness of the product or brand
(which can be measured)
• Number of viewers, listeners or readers reached by the campaign
Method (4) Residual
The residual approach, which is perhaps the worst of all, is to base the
advertising budget on what the business can afford – after all other
expenditure. There is no attempt to associate marketing objectives with levels
of advertising. In a good year large amounts of money could be wasted; in
a bad year, the low advertising budget could guarantee a further low year