• Stage in the product life cycle: New products typically receive large advertising budgets to build awareness and to gain consumer trial. Established brands usually are supported with lower advertising budgets as a ratio to sale.
• Market share and consumer base: High-market share brands usually require less advertising expenditure as a percentage of sales to maintain their share. To build share by increasing market size requires larger size advertising expenditures. On a cost-per-impression basis, it is less expensive to reach consumers of a widely used brand than to reach consumers of low-share brands.
• Competition and clutter: In a market with a large number of competition and high advertising spending, a brand must advertise more heavily to be heard. Even simple clutter from advertisements not directly competitive to the brand creates a need for heavier advertising.
• Advertising frequency: The number of repetitions needed to put across the brand's message to consumers has an important impact on the advertising budget.
• Product substitutability: Brands in a commodity class (cigarettes, beer, soft drinks)require heavy advertising to establish a differential image. Advertising is also important when a brand can offer unique physical benefits or features.
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How does a company know if it will be spending the right amount? If it spends too little, the effect will be negligible. If it spends too much, then some of the money could have been put to better use. Some critics charge that large consumer-packaged-goods firms tend to overspend on advertising as a form of insurance against not spending enough, and that industrial companies underestimate the power of company and product image building and tend to underspend on advertising.
Advertising has a carryover effect that lasts beyond the current period. Although advertising is treated as a current expense, part of it is really investment that builds up a intangible asset called brand equity. When $5 million is spent on capital equipment, the equipment may be treated as a five-year depreciable asset and only one-fifth of the cost is written off in the first year. When $5 million is spent on advertising to launch a new product, the entire cost must be written off in the first year. This treatment of advertising reduces the company's reported profit and therefore limits the number of new product launches a company can undertake in any one year.
There are five specific factors to consider when setting the advertising budget: