How Much Should I Spend on Advertising?

Posted by Dan Evans on Oct 14, 2016 9:10:04 AM

As that shiny coin flips end over end on it’s way up and then down, you may think twice about whether that’s the best way to determine your advertising budget for the year.

Deciding how much to spend on advertising has always been a game of chance. It’s not so much that you’re worried about affording the expenditure, but wondering if your outlay will be effective. Retail innovator and merchandising genius, John Wanamaker, is quoted as saying, “I know that half of my advertising is wasted, but I don’t know which half.”

In general, there have been four methods used to determine an advertising and promotions budget:

Affordable Method

The affordable method is just as it sounds. Used primarily by small businesses, this method involves estimating how much will be left after operating expenses have been deducted from anticipated gross revenue. Then, a portion that can be afforded is dedicated to advertising and promotion. While this method is very common, one of its drawbacks is that it treats advertising and promotion as a necessary evil with little influence on sales revenue.

Percentage of Sales Method

This method uses a percentage of sales as the determining factor. If a company anticipates $1million in sales at a 10% margin, it may determine that 1% of sales ($10,000) is an adequate and affordable budget. Again, while the expenditure passes the legitimacy test, it downgrades the relationship between advertising and promotion, and sales revenue.

Competitive Parity Method

Most businesses have a pretty good idea of the cost to advertise across various medias. They also, if they’re doing their homework, are aware of what their competitors are doing to promote their businesses. Using these two pieces of knowledge, companies can determine what competitors are spending and strive to match or exceed that amount.

Objective and Task Method

Different from the preceding examples, this method bases advertising and promotions expenditures on the goals and objectives set forth by owners and management. Once goals and objectives have been set forth, the tasks associated with achieving them are detailed and costs are determined. This method is different, and more logical, because it bases expenditures on pre-determined goals and objectives that are designed to have a positive impact on sales revenue. Suppose a company would like to enter a new vertical, or customer category, for it’s products or services. They’ve determined that the realization of this goal can generate $100,000 in yearly sales revenue. If their margin is 10%, or $10,000, they would determine what amount of money they’re willing to spend for advertising and promotion in order to achieve that additional profit for a number of years.

While these methods are basic, they are a good rule of thumb to follow in determining advertising and promotions budgets and expenditures. Of course, the costs associated with advertising in today’s economy can vary greatly from what they were in the pre-digital marketing environment. This holds especially true for small- to medium-size businesses who can rely more on social media and relatively inexpensive, and trackable, online advertising as part of their marketing mix.

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Topics: marketing, advertising, marketing budget