Advertising expenses is one of the major expenses of an organization. Part of the advertising expenses is allocated largely on online advertising. In 1990s, most of the advertising is allocated on TV ads and radio ads; however, with the huge usage of internet worldwide, advertisers now shifted to the newest media of advertising – online advertising.

Budgeting is the most crucial part of planning. In fact, budgeting requires specialized expertise to attain a measureable output. The basic question in deriving a budget allocation is – how much are you willing to spend for a desired output. Desired output is measurable. Hence, desired output is dependent on the amount of money you spent for a certain campaign. The best example is Google Adwords. Google Adwords is a Pay Per Click (PPC) campaign.

Without much ado, let’s check three methods in arriving a budget for our online advertising.

(1)    Percentage of Sales – Under this approach advertising spending is set based on either a percentage of previous sales or a percentage of forecasted sales. Generally, an organization set next year’s advertising budget at 3% of this year’s sales level. For instance, if 10 million is the sales for 2009, then three hundred thousand of this should be allocated to online advertising. In this manner, statistics graph for sales and online advertising must have a direct relation. In short, as the sales increases, online advertising budget also increases. Alternatively, companies may consider allocating advertising funds based on a percentage of forecasted sales. In this way, advertising is viewed as a driver of future sales and spending on advertising is linked directly to meeting future sales forecasts. However, since future sales are not guaranteed, the actual percentage spent may be considerably higher than expected if the sales forecast is greater than what actually occurs.

(2)    Affordability – Small companies find spending of any kind to be constraining. Advertising may be just one of several tightly allocated spending areas and; thus, the level spent on advertising may vary over time. As such, advertising may only occur when extra funds are available.

(3)    Best Guess – Companies entering new markets often lack knowledge of how much advertising is needed to achieve their objectives. In cases where the market is not well understood, marketers may rely on their best judgment (i.e., executive’s experience) of what the advertising budget should be.

In summary, online advertising is measurable and definite when it comes to budgeting, e.g. PPC or pay per click management, social networking ads, Google adwords. These methods of budgeting are measurable because mathematically, a certain amount spent has a definite corresponding result for it based on well-studied online advertising campaign. The challenge however is on the conversion on its definite money that can give out of the campaign. Again, this can be measured thorough the use of analytic tool where we can monitor how far our campaign makes conversion.

Hence, to have  definite and more successful online advertising, it is more advisable to apply the first method (percentage of sale) the same as being used by many in all forms of advertising like TV, print ad etc.