Setting Your Annual Advertising Budget
This blog entry was posted on August 13, 2009.
How should a business owner decide on how much money to spend on advertising? What is considered normal? Advertising costs are a completely controllable expense but they should create a return on your investment. How much advertising is enough?.
Each industry will tend to spend a different amount of their sales revenue on advertising. To stay competitive, you tend to follow what is typical for your industry. Companies with higher profit margins will tend to spend more. New start-up companies will need to spend more to get noticed.
The three common methods for advertising budget setting:
- Percent of sales based on industry averages
- Percent of sales based on gross profits
- Based on last year’s advertising expense
Industry Averages: Find out what is typical for your industry. Schoenfeld & Associates consultants of Lincolnwood, Illinois published their study on typical advertising spent by industry. Numbers are a percent of sales revenue.
- 1.3 % Grocery stores
- 4.0 % Lawn/garden
- 5.0 % Education
- 5.1 % Computers
- 5.3 % TV, radio, electronics
- 5.7 % Catalog, mail order
- 5.8 % Retail stores
- 8.6 % Investment advice
- 10.4 % Cosmetics
- 11.0 % Memberships
- 14.2 % Toys
- 14.5 % Cleaning supplies
Gross Profit Margin: Many businesses will allocate their advertising budget based on their gross profit. The following are typical retail store spending on advertising (% of sales) vs. gross profits.
- 1.5% 21% gross profit
- 3% 30% gross profit
- 5% 41% gross profit
- 7% 50% gross profit
Last Years Budget: Established companies tend to estimate next years advertising budget based on what happened last year and what they need to change for the coming year. If you have new products to launch, factor in expenses for these campaigns. You can also shift your marketing mix from traditional media to more cost effective Internet marketing.
To battle rising advertising costs, many companies are shifting their marketing efforts over to the Internet. According to a Forrester Research study 60% of marketers surveyed will increase their Internet advertising budgets by shifting funds from traditional media. Direct mail was cited by 40% of marketers as being one being cut, outranking newspapers (35%), magazines (28%) and television (12%).
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