Establishing Your Advertising Budget

Photo: mconnors/morguefile.com

How do you decide how much money to devote to advertising? You want to get your name out there as much as possible but don’t want to break the bank. It’s a fair question and one that, unfortunately, many small businesses only guess at. The problem with budgeting by instinct, or habit, or by how much money is in the cash register is that little thought is given to maximizing the results and overall ROI.

Establishing a formal advertising budget forces you to take a critical look at what you want to accomplish with your marketing, what’s working for you, how to implement in-store sales and events and – in the end – ensure better results and drive sales.

If you’re a retailer, you probably have a good idea of what products are selling in your store through your inventory and sales records. Future purchases are made based on analyzing this information, identifying trends, keeping abreast of new items, traffic counts, etc. Your advertising decisions should be made with the same amount of precision. If not, you stand a good chance of wasting a lot of your advertising dollars (see last week’s post!).

So, how to actually decide how much of your budget should be allocated to advertising? The best way to do this is by determining the advertising-to-sales ratio for your industry or business category. Based on surveys conducted by Schonfeld & Associates, Inc., the broadest categories are broken down as follows in terms of the percentage of overall sales devoted to advertising:

Natural Resources & Materials – 1.2%
Oil, Gas & Chemicals – 0.4%
Consumer Products – 6.6%
Health Care – 3.2%
Retail – 1.6%
Financial Services – 0.9%
Electronics – 1.3%
Computers & Software – 1.7%
Industrial Equipment – 1.2%
Travel & Transportation – 1.9%
Services – 2.9%
Construction & Real Estate – 2.6%
Communication Products & Services – 3.5%
Wholesale – 0.7%

The above list is what businesses in those broad categories are spending, on average, as a percentage of sales on an annual basis. It’s not necessarily what they should be spending on advertising, but what they are spending. It provides a good baseline to guide your budgeting process.

If you’re a real estate agent, and you’re investing 1% of your revenue on advertising, you can see from the above table that your level of advertising is below the national average for real estate. There are other factors to look at, which we’ll examine below, but if your sales are falling below your goals, or your market share is suffering, this might be a good place to think about making some changes.

If you’re a retailer, 1.6% of sales devoted to advertising may not be enough. There are some additional factors that come into play:

• What kind of traffic do you get in your location?
  High
  Average
  Low
• What is your store’s awareness in the marketplace
  High
  Average
  Low
• How many competitors in your marketplace?
  Few
  Average
  Many
• What is your store’s emphasis on price?
  Little
  Average
  High

There’s no real scientific way of assigning point values to each of these responses, but you can see that if you have a store whose location does not see a lot of traffic, has low awareness in the marketplace, has a lot of competitors, and are in a price-sensitive environment, you will need to add several percentage points to your advertising budget, bringing it to as high as 5-8%.

If you are on the other end of the responses, you could stay at the 1.6% or perhaps just add a percentage point or two. If your situation is average for the above responses, you could safely add two or three percentage points to your budget.

Now that you have determined what your overall budget should be, how do you allocate it throughout the year? The simplest way is break down your annual sales by month and match the advertising budget to the results. If you typically do 8% of your annual sales in January, then devote 8% of your advertising in January.

You may find that tweaks here and there are necessary, but this is an excellent and simple way to determine an overall advertising budget, one that closely matches sales and traffic patterns. You will be able to track the results easily and not rely on instinct or habit to decide how you invest your dollars.

- Bob

Which Half?

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” This famous quote attributed to John Wanamaker, the early 20th century department store magnate, emphasizes the sometimes haphazard way businesses buy advertising. Especially small businesses. Large companies with extensive marketing and research departments usually do a better job with their advertising than businesses that buy based on what their gut tells them.

To lower the percentage of wasted advertising that Wanamaker complained about, first do a little research. You don’t need to hire a research company – you can acquire the necessary information yourself with a simple questionnaire for your customers. Age, gender, income bracket, ZIP code, education level, occupation, and hobbies & interests will tell you a lot about your primary customer.

That’s the key, identifying your primary customer demographically. Once you have a good idea of what that customer looks like, you then match up the media with that customer. Now, it can get a lot more complicated than that, but boiled down to the essentials, that’s pretty much it.

Let’s create an example to look at. Say you own a small suburban shoe store that specializes in higher end women’s shoes. You may have an idea of who your main customer is, but you do some informal research to refine that notion. After you’ve analyzed the results of your surveys, an image of your primary customer emerges: She’s educated, works in a professional field with an above average income, is in her mid-40s, is married with one child, and lives within the same ZIP code as your store.

What can you do with this information? For starters, you can make far more educated decisions about what advertising to utilize to target this customer. Look at individual advertising mediums in your community (newspaper, broadcast TV, cable TV, radio, billboard, magazine, direct mail, web/mobile) and see if a particular type of media reaches your main customer.

As a quick and obvious example of what not to buy, you probably would not want to avail yourself of the fishing channel on your local cable TV provider. Regardless of how cheaply you may be able to buy spots, the chances of reaching a high number of your target audience is slim.

So what should you buy? In this instance, I would take a look at newspaper (newspaper readers traditionally have higher than average incomes and are better educated) and a local magazine that is aimed at the metro area’s arts, fashion, culture, etc.

What about radio or TV? Why not advertise in all media? The presumption here is that, as a small boutique shoe store, your advertising budget is limited. While it’s certainly possible to advertise in all the above listed media, your marketing dollars would be stretched too thin to do any good.

The audience for radio and TV (especially cable) is too fragmented for a small advertising budget to have much of an effect. In later blog posts, I’ll make the case for TV and radio, but in the example of the small specialty shoe store, newspaper and magazine will work the best.

Obviously, the above is all my opinion and there may be other factors at work which may dictate selecting other, or additional, media. But that’s the point of this blog. Let’s get some discussion going!

- Bob