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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

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

If you are a small business owner, you’ve probably seen your customer base erode – unless you were able to invest a little more in your advertising budget, or at least maintain your spending levels. Now is the time to allocate additional money into that budget to increase your share of voice in the marketplace. Remember, as your competitors are cutting back, you can be in a position to attract more and more of their customers, especially if you emphasize the value in the goods or services you offer.

Dozens of studies have been conducted from the 1920s to the present demonstrating that companies who have increased their advertising have seen increased sales when the recession they were in ended. A study by MarketSense during the 1989-1991 recession looked at two national brands, Jif Peanut Butter and Kraft Salad Dressing. Both increased their advertising levels and saw sales growth of 57% and 70% respectively during that period.

The same principles hold for small, local businesses. The numbers may not be as impressive because a typical small business has dozens – sometimes hundreds – of competitors and increases will be more incremental. But even grabbing a few percentage points in a local market is critical.

Focus your advertising on your primary market. Look carefully at what your main customer looks like and aim your advertising at him or her. Not only in what the message says, but the media you choose. In other words, if you run a skateboard shop, you’re probably not going to be advertising in the Wall Street Journal.

Essentially, the same principles are at work whether in a downturned economy or a recovering one. When we finally see real growth in the economy and people are back to work and looking to spend instead of save, you want to be poised to be the first place they think of – and not your competitor.

Why? Because as your competition pulls back, this is the time to grab market share. And at a time of deep recession, it’s impossible to grow your business by relying on an expanding marketplace. Instead, you grow your business by grabbing market share from your competitors.

And how do you do that? By increasing or maintaining your advertising efforts. This increases your brand awareness and keeps your name top-of-mind. There’s a long-term effect as well. When the market turns around and starts heading into growth mode, you will be better positioned to take advantage of that now expanding market.

Of course, this doesn’t mean you should start making reckless advertising decisions. Now more than ever you need to be smart about how you spend your advertising dollars, and see them for what they are – an investment. And invested wisely, you’ll see a return on those dollars.

- Bob

A company’s brand is the set of assets that contribute to the value consumers attribute to that company. A well-established brand, or image, makes your product or service worth more. It’s that simple.

A brand is an image that exists in the consumer’s mind, but it doesn’t happen overnight. Consumers come to believe in a product’s quality, results, reliability and status because they see repeated assurances that the product delivers those attributes.

When consumers are motivated by a product’s brand attributes, they choose that product over similar ones in the marketplace. Why buy a Cadillac over a Chevy? It’s all about the brand.

Branding is just as important to a small business as it is to large corporations. To determine your branding position, you must first take an objective look at your company’s or product’s strengths and weaknesses, how does it stack up against the competition.

Establishing your brand can involve advertising but also includes public relations and, probably most importantly, providing excellent customer service. A consistent message in your marketing will go a long way toward reinforcing your brand.

Building a positive brand image translates into higher profits. The perceived value of your product or service allows for favorable pricing, because customers are willing to pay for the value of your brand.

When creating successful print ads, the adage “less is more” is the way to go. Too often, entrepreneurs stuff their ads full of too many elements and the reader quickly moves to the next ad.

Avoid competing visual elements in an ad, unless you’re featuring multiple sale items. Generally, you want a clear, central message to be conveyed.

Also, too much information, i.e. ad copy, will turn off your prospective customer. Time is precious, and even well-engaged readers won’t take the time to read through long paragraphs of ad copy. Stick to a quick presentation with bullet points to get the message across.

Finally, busy designs and fancy fonts make ads hard to read. Keep the design simple and use no more than two or three fonts.

What makes an ad succeed? Ads that produce results have at least three elements in common: A clear, benefit-laden headline: Readers of your ad will have one question in mind, “What’s in it for me?” An effective headline must contain a compelling benefit. Identify what your customers want most from your product or service, e.g. saving money, quick service, large selection, etc. The ad’s body copy should detail how you will deliver the benefit that the headline promised. Finally, close the ad with a call to action, e.g. “Call today.”

A strong visual focal-point: A great eye-catching visual, whether a photograph or line art, provides the focus essential for a successful ad. Depict a member of your target audience using the product being advertised, for example. Or a stylized illustration of the product. A good fit with the chosen medium: In print advertising, this means utilizing print’s advantages. Print allows you to offer a fuller explanation of your product, service, or company; price points can be easily included; and color can really make your ad pop.

To summarize, a properly crafted ad should attract readers’ attention, be easy to read, guide the reader’s eye through the ad, visually stimulate the reader, and move him or her to action.

Source: Kim Gordon, Entrepreneur Magazine, December 2007

We invite discussion from you, the reader, and encourage you to share your marketing experiences. What works, what doesn’t, and what you’ve learned along the way.

So let’s focus on making your business a success!