Percentage-Of-Sales Method

Procedure used to set advertising budgets, based on a predetermined percentage of past sales or a forecast of future sales. This method of budget allocation is popular with advertisers because of its simplicity and its ability to relate advertising expenditures directly to sales. Management usually determines the budget's percentage figure, which is based on the industry average or the company's historical or previous year's advertising spending. For example, a firm expecting to do $50 million worth of business next year and choosing to allocate 5% of their sales to the advertising budget, would propose a $2.5 million advertising budget. A similar decision may be based on market share, with $2 million being allocated for every share point a brand holds. Many advertisers, however, shun this method because it is based on the theory that advertising results from sales, while the converse is true, that is, that sales result from advertising. In other words, advertisers feel that advertising communicates to prospective buyers the features and benefits of a product that are necessary to generate sales. In addition, the method does not recognize that as conditions change, advertising expenditures should change with them. Finally, using this method may erroneously lead to excessive spending for large established brands and inadequate budgeting for products that may profit from additional advertising, such as new or repositioned brands.

Procedure used to set advertising budgets, based on a predetermined percentage of past sales or a forecast of future sales. This method of budget allocation is popular with advertisers because of its simplicity and its ability to relate advertising expenditures directly to sales. Management usually determines the budget's percentage figure, which is based on the industry average or the company's historical or previous year's advertising spending.