Advertising 101: Is advertising a fixed cost?
A Frequently valued benchmark for any business advertising is to allocate a minimum of 2 percent of the total sales revenue for advertising. Following a rule of thumb since 2009, marketing budgets have continued to be comparatively steady or have increased corresponding to earlier years for the bulk of business organizations.
For eleven consecutive years, a couple of surveys conducted by CMO Survey among the CMOs revealed: almost all or most top marketers admitted to increasing their marketing spend with every passing year.
Although, a significant chunk of most industries allocates a marginally less share of their revenue toward advertising. No claims of the numbers mentioned above have proved to be a hard and fast rule in advertising. Nevertheless, it has been a beneficial plan to pick up an average amount businesses spend on advertising and depend solely on this one singular factor to set an advertising budget for a business.
Similarly, organizations should take to record what their respective competitors spend on advertising for a healthy competition. A combination of all mentioned steps begs to ask the question – Is advertising a fixed cost?
What are advertising costs?
Is advertising a fixed cost? Before answering that question, let’s look at what characterizes advertising costs.
Even though there exists no textbook definition for advertising costs, these costs generally compound an overall expenditure spent in association with promoting an industry, entity, brand, product, or service. Advertising costs generally fall under sales or general and administrative (SG&A) expenses. Often, advertising costs are designated as prepaid expenses on the balance sheet and subsequently moves to the income statement while the advertising expenses in sales revenue.
For instance, if an organization proceeds to launch a direct mail campaign with intentions to drive future sales, the cost of running the direct mail campaign is very likely to be recorded as an asset, a prepaid expense. As customers start responding to the campaign, expenses previously recorded as prepaid expenses will now be repositioned in the books as advertising costs.
Although advertising, in general, is written-off as a current expense in the books, a portion of it is an investment that builds up goodwill for the future. But when it comes to calculating advertisement costs, there are a few methods to determine them.
Let us look into some of them:
1. The percentage of sales approach:
The percentage of sales approach is the most manageable approach. Using this method, marketers take the sales revenue of the preceding year as the base. With the help of the determined base, marketers forecast sales for the upcoming year. Consequently, a contemplated percentage of the forecasted sales is the advertising cost. Since this approach determines advertising on a scale of sales revenue, it traverses to a budget dependent on available funds than market opportunities.
2. The all-you-can afford approach
As the straight and self-explanatory name for this approach goes, the organization contributes a considerable amount to advertising, almost as much as it can afford. This approach appears to be more realistic for organizations willing to spend on advertising for a growing business to spread out of all proportions while setting a reasonable limit to the expenditure incurred on advertising.
3. The return on investment approach:
With this approach, we treat advertising as a capital investment rather than a traditional current expenditure. While advertising possesses a two-fold effect in increasing current-year sales and builds up future goodwill. The return of investment approach primarily emphasizes the relationship between advertisement and sales. Measuring the preceding year’s sales revenue with advertising and without advertising determines a rate-of-return providing a basis for an advertising budget.
4. The objective and task approach:
The Objective and Task Approach, commonly known as the research objective method, gained traction during wartime. Marketers using this method develop their promotion budgets by defining specific objectives by determining the tasks. Although the Objective and Task Approach is an enhancement over the percentage of sales approach, it demands the management to spell out its assumption about the relationship between the amount spent, exposure level, trial rates, and regular usage.
Is advertising a fixed cost?
So, after all, is advertising a fixed cost? Advertising is one part of your overall marketing strategy. While businesses have a fixed budget for marketing, they can allocate a certain budget for advertising within that fixed marketing budget. Therefore, advertising is not a fixed cost, but rather a current expense. This means that businesses need to invest in advertising, be it print or online. It is a necessary investment to grow a business and get more customers. It is current since it’s an ongoing task to create and maintain awareness, get new customers and remind them of your business.
The great aspect of online advertising is that you can choose the budget you want to invest and you can get important insights about your potential customers. Digital ads have a variety of targeting options and campaign goals your business can profit from.
Digital advertising doesn’t have to be difficult!
Although digital advertising has great potential it can easily become costly, if you don’t know how it works and especially how to optimize your campaign. Running a successful campaign is not only about the campaign creating process, but required constant evaluation and optimization of all variables during the campaign runtime. This is what makes sure your campaign is successful.
The great thing is that it does not have to be difficult. A tool like Nanos, offers an all-in-one platform with powerful technology. You can create your campaign in 4 easy steps and let the technology optimize the rest for you, in real-time and based on data. It’s what a marketer would do for you too.