How Advertising Appropriation Works

Several approaches can determine the policy of advertising appropriation. For instance, some companies will set aside a certain fixed percentage of sales towards the advertising budget. Other companies will determine their advertising budget based on what their competitors spend. However, there are special considerations when figuring advertising appropriation.

For example, a new product will require higher spending to market, while a company with a high market share will require less of a budget for advertising. Regardless of the methods used by different companies to determine their advertising appropriation, they must conduct a balance. Balancing is done against the additional revenue the company receives through advertisements.

Normally, companies have a difficult time figuring out the amount of money they should allocate towards advertising. The reason for this is the failure of defining the direct relationship between the advertising amount and the profitability and sales of a company. A significant number of companies choose direct marketing, instead, which allows them direct advertisement distribution and communication directly to their targeted audience.

Advertising Appropriation Example

Skrap is a company the produces wheat-based food products. In most cases, the company uses the direct method of advertising to promote its products. These methods include email, direct mail, social media, and others. With all these methods, the company can figure out the rate of response for their products advertisements.

However, Skrap is planning to release a new wheat product to the market. As a result of this, Skrap will have to evaluate the best method of advertisement to make the target audience aware of the product. Eventually, the company will end up spending more money to grow the awareness of the product. Once the new wheat product has gained a great amount of awareness, the company can continue direct marketing methods.

Types of Advertising Appropriation Methods

Despite the popularity of direct marketing, companies can use other additional methods to determine their advertising budget.

Affordable Method

The method is mainly dependent on what the company thinks it can afford to use in marketing. The method is not dependent on any data or goal. As a result, it can be very unreliable, leading to the amount spent on adverts less than the returns.

Adaptive Control Method

Companies using this method usually use market research to estimate profitability and sales volume depending on various ad budgets. The companies will use test markets to compare advertising levels that are lower or higher than the spending level currently.

Competitive Parity Method

The method involves the determination of adverting budget depending on what the competitors spend. The method assumes that the competitors have marketing goals that are similar and they have a rational execution. The method means that if a competitor is using 6% of the net sales for advertisements, the company will set a similar advertising budget.

Return on Investment Method (ROI)

In this method, companies balance the budget for advertising to the generated profits after advertisements. For the method to be successful, it will depend on the ability of the company to determine the relationship between profits to particular advertising efforts.

Percentage of Sales Method

It involves a company using a certain percentage of the past sales revenue for advertising purposes. The method is simple for small businesses to implement. The business owner determines the fixed percentage, which is usually between 2% to 5% of the sales for the previous year.