Marketing 13th Edition by Gary Armstrong, Philip Kotler

Exercise 4

Using the percent-of-sales method, an advertiser sets its advertising budget at a certain percentage of current or forecasted sales. However, determining what percentage to use is not always clear. Many marketers look at industry averages and competitor spending for comparisons. Web sites and trade publications publish data regarding industry averages to guide marketers in setting the percentage to use. For example, firms competing in the toy and apparel industries spend 10 percent or more of sales on advertising, whereas firms competing in the mortgage servicing and insulation industries spend less than 1 percent of sales on advertising. You read about GEICO at the beginning of the chapter. It is the number-two auto in-surer with $17 billion in revenue last year. It spent $1.1 billion on advertising that year and plans to continue spending the same percentage of sales on advertising next year. The aver-age advertising-to-sales ratio for the insurance industry is 0.1 percent of sales.
How much would GEICO budget if the company based its advertising spending on the industry advertising-to-sales ratio? Is GEICO consistent with average industry ad spending? (AACSB: Communication; Analytical Reasoning; Reflective Thinking)