Is Advertising a Fixed or Variable Cost? The Definitive Guide to Marketing Expenses & Budgeting

The best bet is to settle on a set of business goals and build a program around those. If we carry 10% of revenues forward as marketing investment, we only have $400k to work with in 2023. As intimidating as this SG&A abbreviation looks, it’s quite a simple one that stands for sales, general and administrative. SG&A expenditure comprises all the direct, indirect, and residual expenses which are necessary to run a company. It’s kind of a miscellaneous category that includes the expenses incurred daily as well as those which are not directly related to the production process. To reach the break-even point, the high variable cost companies need to produce less as they can adjust their costs in time with their production process.

Not only that but when there are seasonal variations, the market demand and supply change. To accommodate these changes, the business owner will cut down or pull up their variable expenses for advertising. It will spend more on its advertising during the monsoon season compared to the winter season as there will be a revenue surge in the monsoon season. Sometimes, companies pay for advertisements in advance to media companies.

• In terms of advertising, fixed costs refer to expenses that do not change based on the amount of advertising a company undertakes.
• Because all businesses market their products and services, a marketing expense is a great example of sunk cost.
• Examples of fixed costs include rent, equipment lease, management salaries, and advertising.
• Raw materials are one of the variable costs, depending on the quantity produced.
• They work the same number of hours every week, so payroll is generally fixed.
• Understanding this distinction is essential for accurate budgeting and financial planning within organizations.

The Hybrid Approach

Selling expenses are part of the operating expenses (along with administrative expenses). Whatever a business spends on advertising, the point is to maximize the ROI of advertising costs. This can be difficult because there is no shortage of advertising opportunities out there to consider.

What are variable marketing costs?

Advertising costs will in most cases fall under sales, general, and administrative (SG&A) expenses on a company’s income statement. They are sometimes recorded as prepaid expenses on the balance sheet and then moved to the income statement when sales that are directly related to those costs come in. However, if they are paid salaries (where they are paid no matter how many hours they work), then this is a fixed cost.

Are Advertising Expenditures Classified As A Fixed Or Variable Cost? Explain? ›

Advertising budgets are one of the most common types of discretionary fixed costs. This ensures the agency receives guaranteed pay while also being motivated to drive results. In the context of advertising, knowing whether your costs are fixed or variable can drastically impact how you plan, execute, and measure your advertising efforts. In 2022, the total market shrinks to $80 million, but your company still captures a 5% market share, resulting in $4 million in revenue. Regardless of whether advertising is classified as fixed or variable, effective cost management is essential.

Carvertise: A Hybrid Advertising Model That Bridges Fixed and Variable Costs

” they’re not just pondering a financial classification; they’re evaluating a core element of their budgeting strategy. To make the most of your fixed marketing expenses, it is also important to track and measure the performance of your marketing campaigns. As a marketer in the manufacturing industry, you understand the importance of investing in marketing efforts to achieve growth and expansion. However, when revenues start to decline due to changing market forces, the natural response is to reduce marketing expenses. In this blog post, we will explore the difference between fixed and variable marketing expenses and how they can impact your company’s revenue growth and marketing ROI. Fixed costs remain constant irrespective of the level of production or business activity.

• This distinction is crucial in forecasting the earnings generated by various changes in unit sales and thus the financial impact of proposed marketing campaigns.
• This includes setting realistic advertising budgets, negotiating favorable advertising rates, and diversifying advertising channels to minimize risk.
• These cost changes can vary from high to low based on the production level.
• It is essential to create a marketing plan that aligns with your company’s goals and values.
• Commercial leases often have a fixed rent per month plus an additional rent based on the amount of production or sales.

The market share of a firm decides the amount of promotional money needed. If a firm has a lower share, it needs to spend more as compared to firms having a larger share. Firstly, traditional advertising involves displaying advertisements on television, radio, or print them. The other one is digital advertising which is becoming a more convenient choice for companies as more and more customers are using digital media. There are some variables or factors that need to be considered when creating an advertising. These factors are waste, reach, frequency, message permanence, persuasive impact and clutter.

Average CTR for Instagram Ads in 2025 Benchmarks & Tips

But if you just allocated the money for later use then there really isn’t a hard limit to change how much money is advocated for advertising. Variable costs fluctuate in direct proportion to changes in production or sales levels. In the context of advertising, variable costs refer is advertising a variable expense to expenses that increase or decrease depending on the extent of advertising a company undertakes. Advertising represents a discretionary fixed cost, meaning the level of spending is up to company management and the spending level can change from one budget period to the next. There’s an ongoing process of evaluating how well advertising spending is working, and how advertising is affecting sales.

Companies can adopt various approaches to allocate their advertising budgets, ranging from fixed budgets to percentage-based allocations and competitor-based costing. A fixed cost like advertising can still increase or decrease throughout the year, depending on the season, the weather, the market and demand, or other factors. Toy companies, for example, ramp up advertising in the fall, just before the holiday season, while warm-weather resorts will budget more for print ads and broadcast spots in the winter. Simply spending the money is no guarantee, of course, that a business will get the return on investment they want with their ad expenditures. Some media outlets offer a 40%–50% discount for running ads in slots left open due to cancellations. Some companies with seasonal products may employ a flighted media schedule to target their advertising dollars to specific times of the year.

During planning and budgeting, it is important to know what your fixed costs are and how they affect the profitability of the company. A variable cost that is paid becomes a form of fixed cost called a sunk cost. Avoidable fixed costs become unavoidable fixed costs once the cost has been paid. Likewise, a variable cost becomes a sunk cost once it has been paid as shown in the figure below. For example, purchasing $2,000 worth of erasers to use in making pencils is a sunk cost. As you progress through the production period, costs that were initially variable become fixed.

The U.S. Small Business Administration notes that many businesses set their marketing budget as a percent of revenue. Business to consumer (B2C) companies generally spend more than business to business (B2B) and service companies spend more than product companies. For example, wages and related benefits of employees who operate machinery to produce valves represent direct labor costs for Friends Company. If a new firm has entered a market it has to strategize its budget to spread its name to attract customers.

A fixed cost is a cost that doesn’t change much in value regardless of factors like sales revenue or output. Fixed costs tend to be ongoing costs, like insurance, wages, depreciation, rent and interest. Businesses with high fixed costs such as printing operations and manufacturers have higher margins than other companies, according to Business Dictionary. Graphically, we can see that fixed costs are not related to the volume of automobiles produced by the company. The dollar amount can vary from one quarter or year to the next, but it represents a fixed cost.