Advertising has a carryover effect that lasts beyond the current period. Although advertising is treated as a current expense, part of it is really an investment that builds up an intangible asset called brand equity.
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.
The following are the five factors that are considered while setting the advertising budget:
- Stage in the product life cycle: new products typically receive large advertising budgets to build awareness and to gain consumers trial.
- Market share and consumer base: the brands having a high market share usually require less advertising expenditure whereas for products whose brand needs to be built, requires larger advertising expenditure.
- Competition and clutter: In today’s competitive market, where there are a large number of competitors, a brand must advertise heavily to be heard.
- Advertising frequency: the number of repetitions that need to be made to put across the brand message to consumers has an important impact on the advertising budget.
- Product substitutability: brands in the commodity class require heavy advertising to establish a different image. For example, cigarettes, beer, soft drinks. Also advertising is important when the brand can offer unique physical benefits or features.