Advertising budget: What is it, and why does it matter?

In a competitive marketplace, advertising is an essential tool for any business looking to grow, attract new customers and drive sales – and that makes the advertising budget just as essential.

An advertising budget helps you allocate your resources effectively and ensure your advertising efforts align with your business goals while optimising your return on investment.

In this article, we’ll cover what an advertising budget is, why budgeting is important in advertising and 8 steps to determining your advertising budget.

What is an advertising budget?

An advertising budget is the amount of money a company plans to spend on paid advertising of their brand, products or services over a set period of time – typically a quarter or year.

Ads play a vital role in getting a brand seen. The advertising budget goes to covering the cost of those ads.

This includes running the ads, designing and producing the ad creatives and other expenses related to advertising – e.g. hiring an agency to manage their advertising campaigns. 

Without a well-planned advertising budget, even the best marketing campaigns can fall flat – or end up costing more than they return. With a proper budget, however, you’ll be able to maintain financial control, improve your ROI and gain a competitive edge in the market.

In short, an advertising budget is more than just a financial plan: it’s a strategic investment in your business’ future.

Why is budgeting important in advertising?

Budgeting plays an important role in advertising. It’s tied to maximising the effectiveness of your advertising and ensuring your business meets its marketing objectives – without overspending.

Here are some key reasons why an advertising budget is so important:

• Better resource use: Without a clear budget, it’s easy for advertising costs to spiral out of control. Conversely, it’s just as easy to miss opportunities due to underfunding. A well-defined, balanced budget helps ensure you only spend what you can afford – and that you invest enough in the right channels.
• Goal-orientated planning: Budgeting forces you to clarify your marketing and advertising goals. This helps you allocate funds to channels that align with those goals and invest less focus in lower-priority efforts.
• Maximised return on ad spend (ROAS): Setting an advertising budget helps you monitor and optimise your ad campaigns, ensuring you get the highest return on every pound you spend. 
• Informed decision making: Budgeting allows you to benchmark your results year over year or campaign over campaign. This helps you identify trends, successful tactics and opportunities for improvement to guide your future advertising decisions.
• Transparency and accountability: A clearly defined budget helps ensure that from marketing and finance to leadership teams, everyone across your business is aligned and understands how much is being spent, where it’s being spent and why.

Overall, budgeting for advertising ensures your financial resources are used effectively and that you reach your target audience efficiently while maintaining control of your overall marketing strategy.

You might also be interested in: Guide: How to create a marketing budget

8 steps: How to determine your advertising budget

Determining your advertising budget involves a series of steps that take into accounts your business goals, industry norms and available resources.

To make it easy, we’ve compiled a list of eight steps to determining your advertising budget:

1. Set clear goals and objectives

To determine your advertising budget, the first thing you need to do is set clear business goals and objectives. Are you aiming to increase brand awareness, boost sales or launch a new product? The more ambitious the goal, the more you should invest in advertising.

Define key performance indicators (KPIs) like sales growth, leads generated or website traffic. These will help you understand how much you should invest to reach your targets.

You might also be interested in: 6 steps: How to manage a marketing budget

2. Review industry benchmarks

Different industries allocate different percentages of their revenue to advertising. For example, consumer goods and retail may spend more compared to industries like manufacturing.

Research your industry, and look at what your competitors are doing. Don’t copy them outright, but try to get an understanding of their level of investment. This’ll help you remain competitive in your industry.

3. Determine your available revenue for advertising

There are a few different ways to determine how much money you’re able to spend on advertising.

A common method is to allocate a fixed percentage of your projected or current revenue to advertising – typically between 5-10% for established companies and up to 20% for startups or businesses launching a new product.

Some businesses base their advertising budget on their operating income – this is often the case if they want to tie their advertising spend to profitability rather than overall revenue. Research your options and choose what works best for your business.

4. Choose your budgeting method

When it comes to choosing your budgeting method, you’ll want to consider your industry, growth stage and business size.

Depending on these factors, there are a few common approaches to budgeting for advertising to consider:

• Percentage of revenue: We mentioned this above. You set aside a percentage of your annual revenue for advertising – often between 5-10%. This approach is best for stable businesses with consistent revenue.
• Objective-and-task method: You define specific marketing objectives and determine the cost of the tasks needed to achieve them. For example, if your goal is to generate 1,000 leads, you estimate the cost of the ads, content or campaigns needed to get there. This approach is good for specific growth goals or if you’re launching a new product.
• Competitive parity: You set your budget based on what your competitors are spending – either by matching it or surpassing it. This approach is used in competitive industries where market share is closely watched.
• All-you-can-afford method: This one’s simple. After covering your essential operational costs, you allocate whatever’s left to advertising. Small businesses and startups with limited financial resources often choose this method.

There’s no one-size-fits-all solution to which budgeting method you should choose – just make sure you consider what’s best for your business.

5. Consider digital and offline advertising channels

You’ll want to think about how much of your budget will go into online advertising (e.g. social media and search engine ads) vs traditional media (e.g. TV, radio and print).

It’s important to note that digital advertising is often more cost effective and allows for more precise targeting and measuring – for that reason, we recommend focusing more of your resources towards online advertising.

Regardless of what you choose, it’s important to remember that different channels have varying cost structures. For example, TV ads can be costly, while pay-per-click (PPC) advertising on social media or search engines may give you more control over spending.

6. Use data and analytics

If you’ve previously run ad campaigns, use performance metrics to inform your future budgets. With data on your side, you’ll be able to allocate more funds to high-performing channels.

Analyse how much you spent in the past. Compare it with what you achieved – and adjust your approach accordingly.

7. Consider external factors

Before you finalise your advertising budget, remember to consider external factors. For example, during recessions or economic downturns, some businesses may have to reduce their advertising budgets while others choose to increase their spending to take advantage of the decrease in competition.

If you experience seasonal demand spikes, you’ll also want to consider increasing your budget during peak periods and decreasing it during slower times.

8. Monitor and adjust

Budgeting for advertising isn’t a one and done process. Be prepared to make adjustments based on the performance of your campaigns – for example, if a digital campaign is generating strong results, you may want to put more funds towards it later in the year.

Consider allocating a small portion of your budget for experimentation (A/B testing) to explore new channels or audiences without risking too much of your total spend.

Wrapping up

A strategic advertising budget is vital for the growth of your business. It helps you balance financial discipline with creative freedom, ensuring your advertising campaigns drive awareness, engagement and revenue.

By following the steps above and putting careful thought into your advertising budget, you can set your business up for long-term success and stand out in an increasingly competitive market.