Before discussing the cost of advertising and the factors which influence its cost, and before going on to discuss ways of arriving at a budget of advertising costs, let us face up quite frankly to the perennial question: who pays for advertising? The answer to this question is one of the keys to the determining of expenditure on advertising.
In any business, there are only three people, or groups of people, who can pay for running a business and making a profit. They are the investors, who include both the bank which permits an overdraft and the supplier who provides credit; the business-persons who may use their own capital plus the income they earn; and those who buy their goods or services. If the business fails, the investors fail and in effect pay the bills through their own losses. If the business succeeds everyone profits and everyone is satisfied.
Only if a businessperson sells goods or services at a price higher than his costs, it is possible for him to make a profit. His costs include his selling effort, which may mean renting a shop, hiring a salesman or advertising in the local newspaper and these promotional expenses can be multiplied according to the size of the business. If he is to recover these costs and make a profit they can come from only one source, the customer who pays the price for the goods or services.
If the product sells easily, the cost of promoting each unit is slight. But, if it's a new, a costly or a difficult product to sell, the advertising cost per unit will be high.
Assuming that products or services are sold, the cost of advertising is borne by the buyer. However, if the goods remain unsold despite monies spent on advertising, the cost of advertising reverts to the producer or distributor who has failed to make the necessary sales and so pass on or recover his costs plus a profit. Even if he sells off the goods at a reduced price, and forfeits the profit, he is still seeking to recover his costs.
This has to be said because a false idea exists that the cost of advertising is taken out of profits. There are even some business-persons who delude themselves to the extent that they speak of spending on advertising 'what they can afford', as if it were a sacrifice, donation or something they could avoid, when in fact, to make a profit, they can not afford not to advertise, or at least adopt some form of persuasive sales-promoting action.
But, this is not to say that advertising is an unjustified part of the price. It is an old chestnut to say that a certain product costing a fraction of penny to produce is sold at an exorbitant price. It costs a lot to distribute products, and advertising is a distribution cost. The price of advertising may be the difference between enjoying a product and not having it at all.