If you do not put enough gas in your car you are not going to reach your destination… if you don’t adequately fuel your business marketing efforts, your company will be stalled as your competitors pass you by. Developing an advertising/marketing plan and allotting a realistic budget is like planning a cross-country trip: You will need the latest maps to determine the best route, make sure your vehicle is tuned-up and ready to go, and budget enough to cover all travel expenses. This is why marketers need an ad budget. Likewise in commerce, every marketer needs a plan based on up to date marketing data and a budget sufficient to fuel the campaign. The budget determines the destination and the route in both travel and business. So planning and budgeting are essential to reach a travel destination or business sales objectives.
How much should a business spend on advertising? It depends who you ask. An accountant once told a client, 4% to 5% of gross sales. While that’s national the average for all industries, it is not realistic for every business. Several factors determine the appropriate percentage. Reaching customers in specialized industries may need less, while the cost of reaching consumer markets needs to be greater. Competition, sales goals and cost margin all play a role in setting an ad budget. Smaller companies spend proportional more than large corporations, because of dollar sales volume.
Ad budgets by % of gross sales vary greatly by industry. Traditionally companies selling high markup consumer products are on the high end of the scale of 15% to 30%. Industrial products and wholesale markets may allocate about 1%. Percentages from company to company, within the same industry, vary greatly. In some cases the percent of gross sales may seem low but total dollar amounts in sales are high, as ad expenditures are in the millions. Small companies must spend more (8% to 12%) to be competitive. The method used to establish the budget is crucial. Marketers may be misinformed or naive on how to allocate funds for advertising and promotion. Here are some examples of misguided methods:
MATCHING COMPETITION. Unimaginative management may determine their company’s spending level based on what their competitors have been doing. They are afraid to spend less because they may loose business to a more aggressive competitor, and yet, reluctant to spend more because, “it might not work” and they feel they cannot afford to take that chance. If all companies were identical this method might have some merit, but they are not.
DO WHAT WE DID LAST YEAR. Play-it-safe executives may take the most conservative path. “It worked in the past it should work again”. What they fail to understand is that each year products, markets, competition and customers attitudes change. Being confined to a continuation of last years budget (and last years thinking) restricts creative marketing and stymies company growth.
MANAGEMENT EDICT. “This is what we are willing to spend” means a specific sum to fund an ad program based on cost alone. This is a directive, usually approved by management, who does not believe in advertising, so they limit the dollar amounts to what they are willing to risk. It is rarely enough, and usually allocated without the benefit of market research or cost-to-reach market factors or objectives.
TASK METHOD. What is it going to cost to do selected project(s)? It may be a catalog, packaging design, running ads specific in a select media or building a website. These are price shoppers, looking for a deal on item expenditures without understanding the relevance of elements in a comprehensive program. Buying “a la carte” can be expensive and not relevant to the elements, required to implement a cohesive marketing campaign objectives.
PERCENT OF LAST YEARS SALES. This one may sound respectable, but it is not. The problem is, if marketers solely rely on what was done last year, they are relying on ancient history. A percent of last years’ sales is great if this year will be a mirror image of last year, but it never is. Each year presents new challenges and new opportunities. There are always changes in business, market, competition, products and services.
Listed above are budget methods that are NOT the most effective way to fund a marketing campaign, and not recommended by marketing professionals. What is? Experienced marketers utilize a combination of sales projection and cost of specific elements. Here is the recommended formula to establish a realistic marketing budget:
PERCENT OF PROJECTED GROSS SALES, PLUS TASK FACTOR (recommended method). This is a budget based on gross sales projections for NEXT year and the task to promote new products / services and/or expand into new markets. By realistically projecting sales for the coming year a percent is allocated to support that goal. The “TASK” budget is determined by costs required to accomplish specific objectives, like introducing a new product(s) or entering a new market(s), etc. So the combination of a % of projected sales, combined with funding specific objectives is the best method to allocate funding for advertising and promotion.
An advertising budget is a CAPITAL INVESTMENT in business. Like all investments if properly managed it is intended to bring a return, but there are no guarantees. It is essential to have a marketing strategy with a comprehensive plan of coordinated advertising, collateral, PR and sales support elements adequately supported by an adequate advertising budget.
An experienced advertising/marketing consultant can help a business determine the appropriate “percent of gross sales” ad budget for the company. To get started every business needs an objective Marketing Analysis conducted by a marketing professional. This will be the basis for the Marketing Strategy set forth in the marketing plan. From that plan, a budget can be allocated to develop, produce and implement a coordinated advertising/marketing campaign. For more information, marketers in Orange County California contact: www.smisek.com.