How to Set an Advertising Budget

Date: January 29, 2010

How much should you spend on advertising your business? The price to promote your company can escalate quickly -- newspaper ads, banners, radio spots, direct mail, online marketing, telemarketing. It all adds up. Here are the top four methods for setting an advertising budget used by the most successful independent businesses:

1. Fixed percentage of sales. Start with last year’s total gross sales or average sales for the past few years, then allocate a specific percentage of that figure for advertising. Most businesses set aside between 2% and 5% of annual revenues for advertising. So if your annual sales are $300,000 then spend $6,000 to $15,000 on advertising.

  • Pros: It’s easy to understand and safe: Rather than predict the future, you’re dealing with a known amount. If you’re in a stable, predictable industry, this method is sound. This strategy keeps your budget in relation to sales volume -- the very thing advertising is attempting to affect.
  • Cons: The budget is based on past performance. You may lose the opportunity to capitalize on shifts in the business climate or customer trends. This method also assumes that sales are directly related to advertising, which isn’t always the case. Numerous other factors affect sales.

2. Comparable to the competition. Adopt the industry average for ad budgets for your company. Many trade associations and industry publications can provide the average amount or percentage companies spend on advertising. 

  • Pros: This is an easy approach for companies with predictable sales patterns.
  • Cons: It assumes that the industry average applies to all businesses in the marketplace. Companies may ignore local market forces -- and miss opportunities to increase market share -- if they stick rigidly to this figure rather than boost spending.

3. Objective and task-based. Begin by setting specific marketing objectives and deciding on the tasks required to meet those objectives. (Example: Increase out-of-state clients by 5% using online promotions.) Then determine your budget by estimating the costs of carrying out those tasks. If you can’t afford to fund all your ideas, rank them and focus on the top few.

  • Pros: It’s an accurate method: It ties the use of funds directly to the tasks you want to accomplish. If properly executed, the advertising becomes an investment, not an expense. By spending whatever is needed, the company may grow at a faster rate.
  • Cons: If the advertising campaign flops, it can be pricey. You may not recoup costs on a bad promotion.

4. The maximum amount. Lots of fast-growing businesses put their faith in this strategy, which advocates setting aside just enough money to sustain the business -- and your family -- then spending the rest on advertising. 

  • Pros: Like most aggressive methods, it offers the reward of rapid growth.
  • Cons: It’s risky. Unless you have a solid reserve to operate your business, you may run it into the ground if your advertising fails.

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