How Much Should I Spend On Advertising?
Updated: Sep 28, 2019
At POP MKTG we help business owner’s stop flushing their marketing dollars down the toilet!
Small business owners who know their numbers want to know how much to spend on advertising. The academics, and any quick Google search, will tell you to invest anywhere from 5 to 10 percent of your business’ gross annual revenue into advertising. At POP MKTG, we call this percentage an “ad to sales ratio”. This ad to sales ratio is different for all industries, but in a local market, it is always safe to start at 5%, and going all the way up to 10% will only make sales happen FASTER! And who doesn’t want more sales faster?! How do you determine your future ad spend? By your future revenue projection.
The academics, and any quick Google search, will tell you to invest anywhere from 5 to 10 percent of your business’ gross annual revenue into advertising.
Let's Dive In
I always like to see what the big dogs are doing out there in the Fortune 500 fight! For example, take a look at Dick’s Sporting Goods’ annual report and you will see that in 2018 they spent 3% of their revenue on advertising. So if you are running a local sporting goods outlet, it is probably a good idea to be spending at least 3% of revenue on advertising to stay competitive in your market.
Yes, this is less than the recommended 5-10% I stated earlier, but not all business categories are the same, and Dick’s Sporting Goods is no longer in “new business” mode. Meaning, they aren’t spending to aggressively grow market share like they did in their first 10 years of business. Also, this ad to sales ratio KPI (key performance indicator) should decrease as your advertising starts to generate sales. What am I saying? You start spending 10% of revenue at first on your advertising, then sales start to pick up, causing your ad to sales percentage to fall. This means its working!
Monthly Ad Budget Equation
New Business: Annual Revenue Goal x 10% = Annual Advertising Budget
Established Business: Annual Revenue Goal x 5% = Annual Advertising Budget
(How do I know if my business is a new business to the market or established? If you have been in the market for less than 10 years, and have not made a significant investment in your marketing, you are more than likely a New Business to the market. This isn’t a bad thing! Once you start advertising properly, you will experience an enormous growth spurt!)
Let’s Try an Example
Let’s say you want to do $1,000,000 in sales next year. If you are a new business I recommend starting at 10% ad to sales benchmark. We take $1,000,000 and multiply by 10% and you get $100,000. Next, we distribute this $100,000 equally across each month. That leaves us with $8,333.33 per month to spend on our advertising. After a year or so of tracking your advertising KPI’s, you may want to adjust this budget to be heavier in your peak months, and less in your slow months. For example, if you sell pools or motorcycles, you may want to back off of your advertising in January. However, this is just a guideline, not a rule. I work with a roofing company that advertises heavily in the winter months (double’s up in the winter time) which has changed the markets paradigm about roofing in the winter time, causing record sales!
After a year or so of tracking your advertising KPI’s, you may want to adjust this budget to be heavier in your peak months, and less in your slow months.
Advertising is an Investment, Not an Expenditure
Advertising executed properly doesn’t cost you a dime. With the proper message, offer, and placement, your advertising should pay for itself. How? Let’s get into the weeds:
You sell a $1000 widget that you have a 30% margin in (meaning you have a $300 profit margin per widget sold). Your annual sales goal for the year is $500,000. In order to sell $500,000 in $1000 widgets, we need to tell as many people as possible that you sell $1000 widgets (AKA advertising). Now, take your $500,000 sales goal and multiply it by 10%. That equals $50,000. Now, distribute the $50,000 evenly each month into $4,166.66. Each month, you will need to sell 13.88 widgets to pay for your marketing investment. 💥
Now, many business owners will say, “but that $300 profit margin is my money, not the advertising’s money”.... 🚨 WRONG!!! This mentality is completely wrong and one of the biggest reasons businesses fail. By the way, the average business only survives for 10 years, so pay attention. Stay with me here, the $300 profit margin is not YOUR money, or your business’ money. It’s your customer’s money that then gets reinvested into your advertising to help you find more customers. This fundamental concept is the key to growing your business exponentially.
This mentality is completely wrong and one of the biggest reasons businesses fail.
What if I don’t have 10% of my Annual Sales goal to start buying advertising?
The beauty of many advertising outlets, is that you don’t have to pay up front. Television and Radio do not bill you until the commercials have physically aired each month. For example, you get your TV invoice on September 30th and it’s not due in full until October 30th. If you use an agency, your bill isn’t due until later. At POP MKTG we typically require payment within 60 days of a traditional advertisement airing.
Also, if you are using digital advertising like Facebook or Google Ad Words, you use your business credit card, which isn’t billed until the end of each monthly cycle, giving you a nice 30 day window to sell some $1000 widgets.
In summary, choose an advertising outlet that gives you a 30 day window to pay your bill. That way your advertising is completely funding itself, not costing you a penny.
That way your advertising is completely funding itself, not costing you a penny.
How Do I Start Advertising?
Once you have determined what advertising budget makes sense for your business, the next step is choosing which marketing partners to work with. There are literally hundreds to choose from. I would argue that there is no bad place to advertise. However, there are more effective places to advertise. For more details on which outlets are most effective for advertising, contact us at POP MKTG and we can give you some quick tips on how to get started. We can also provide a full audit of your current marketing systems to see if they are generating you a healthy return. Or, many of our clients enjoy participating in one of our Discovery Sessions where we get into the meat and potatoes of how your business runs, so that we can help you make marketing decisions that will produce more cash flow.
I would argue that there is no bad place to advertise. However, there are more effective places to advertise.
Advertising is a science that can be measured. Determining your advertising budget will expedite your company’s success. And finally, understanding that advertising pays for itself, with your customer’s money, not your money, is a step towards total marketing enlightenment.