7 Steps for Calculating an Ad Budget in an Enterprise

How AGATA optimizes the budget and increases its efficiency

Hi! My name is Eugene Lukin, I'm the Head of Marketing at AGATA algorithm. Today let's talk about ad budgets on an industrial enterprise.

Advertising budget has long been a stumbling block in the marketing department. And, if in B2C markets with Big Data and direct interaction with the end consumer through digital, marketing costs are generally justified, in B2B this data is simply not there, and the marketing department is forced to look for other ways to justify it.

How enterprises usually calculate an ad budget?

For instance, a number of industrial enterprises base the size of the ad budget on their indicators from the previous year (spent this amount on advertising, sold that much), which means that next year they need to set approximately the same values. In essence, this is advertising-to-sales, however, in the absence of data on competitors or the average market a/s, it is not at all clear whether it is under budget, overpriced or in line with the market.

Other enterprises simply copy the competitors’ budgets and channels, with complete confidence that these are doing everything correctly and in sufficient volume, thus excluding any assessment of the effectiveness of advertising costs.

And still others go with the question “how much should we spend on advertising” to an advertising agency, where they are usually answered either “the more the better” or “we just cannot know this, so let's try all the options”. Most ad agencies simply don't have enough empirical data on B2B.

However, all these approaches exclude the fundamental aspects of forming not so much an advertising budget as a much more extensive - marketing budget of an enterprise.

Why is it necessary to talk specifically about the marketing budget?

Nowadays, the concept of marketing budget has become rather vague. Some companies understand it exclusively as advertising. Others are focused exclusively on digital, considering it to be the main way to drive sales.

However, the concept of a marketing budget is much broader. It includes not only the ad budget, but also merchandising, trade marketing, R&D.

Direct advertising
costs associated with promoting products through online and offline channels, such as TV, press, OOH, SEO, SMM, etc.
POSm and equipment
costs associated with the search for commercial equipment, the creation of structures at points of sale, etc.
Trade marketing
costs aimed at maintaining and stimulating the activities of the sales department. Includes: activities; promotions for dealers and representatives; all BTL events
Research & Development
costs associated with consumer research, competitor research, purchasing data, competitor samples, etc.

The company indicates which articles are used in the promotion. By using a wider list of items in the marketing budget, the company gets a more measurable, and therefore more manageable process.

How does AGATA determine the optimal budget?

The AGATA algorithm is a set of field-proven mathematical techniques that govern the marketing and sales departments of a manufacturing enterprise. Its algorithms also help create a smart marketing budget, which is formed in several steps:

1. Budget items

The company indicates which marketing items it uses in the framework of its activities:

Direct advertising,
Merchandising / POSm,
Trade-marketing,
R&D;

2. Market role

The company then chooses which industry it operates in and what position it occupies in the market, within each product category. There are 3 roles to choose from:

The Leader
The Follower
A new, niche player or innovator;

3. Benchmark

Next, the company chooses how it wants to calculate its marketing budget using a national or international advertising-to-sales standard, a benchmark. A company can choose a national regulation if it does not intend to promote this product category on the international market.

4. Advertising-to-Sales

Then, based on the previous steps, the correct advertising-to-sales metric is calculated. AGATA also shows the share of each budget item in the structure of marketing costs, based on the benchmark.

This is the first stage in which the company gets an idea of how much money similar enterprises are spending on the marketing budget in the market of this product category.

CASE STUDIES

The telecom operator’s ad budget efficiency increased by 8 times

Today we will talk about how the use of mathematical models that underlie the AGATA algorithm allowed the telecom operator to reduce the advertising budget by 35%, while achieving an 8-fold increase of its efficiency.

5. Detailed sales plan

Then the company carries out sales planning within each product category, brand, geography and distribution channels. Based on this, it obtains the values of how much its sales can grow in the considered year, broken down into 4Ps.

6. Sources of growth (4P)

In marketing, there is the concept of 4P (Product, Price, Place, Promotion), which form the marketing mix. And Promotion is only 1 out of 4 parts of the mix. This means that the company has an even wider and more manageable list of levers to increase sales and revenue. AGATA shows what share of sales growth the assortment, price, trade and communication policies are responsible for.

All calculations at this stage are performed automatically based on the platform's mathematical algorithms, which minimizes the likelihood of human error.

7. Marketing budget

AGATA then recalculates the marketing budget. Here it takes into account all the previous stages of calculations. As a result, marketing budget figures can be higher if more sales promotion is required, or less.

Marketing budget algorithms interface

AGATA algorithm

And, following the priority of the marketing mix, the budget for direct advertising is considered here on a leftover basis, remaining within the previously defined advertising-to-sales rate. At the same time, the employees of the marketing and sales department still have the opportunity to adjust the breakdown of 4Ps, if necessary.

AGATA allows the company to form a reasonable marketing budget and reduce the dependence of sales and revenue growth on direct advertising by using a full set of marketing mix.