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Daily Archives: April 10, 2011

How Much Should A Small Business Spend On Advertising?

How much is your advertising budget?
What’s that? You don’t have an specified budget. Not a good idea. Whether you are a new business or an established one, in order to maintain sales and continue to grow your business, you need to advertise.

Unless of course, you have a great reputation, consistent product or service delivery, fantastic location and affordable pricing. Right? That is why you never see McDonald’s advertising. Wait a minute, that’s wrong. They do advertise. Ask yourself, what if McDonald’s stopped advertising. Would they still be number 1 five years from now? I think we all know the answer to that one.

So how does a small business determine how much to spend on advertising?
There are many ways to go about establishing an advertising budget, some more complicated than others. Here is a list of the most common:

        • Percentage of Sales
        • Objectives
        • Industry Comparison
        • Market Share
        • Unit Sales
        • Available Funds

Available Funds Budget
I’ve been working with small business owners for years and from my experience, the most popular method is “Available Funds”.  Is that a good idea?

Here is a great quote from SCORE: “Often, small businesses estimate their sales revenue, cost-of-goods, overhead and salaries, and then gross profit. Anything left is considered available funds for marketing support. That’s not such a good idea. … If you are the new competitor in the marketplace, you will have to spend more aggressively to establish your market share objective.”(To read the complete article from SCORE – CLICK HERE).

Percentage of Sales Budget
I think the easiest method for determining an advertising budget is the “Percentage of Sales Budget”. Most experts recommend anywhere from 4% to 10% of sales. The percentage should probably be lower if you are renting premium space for your business versus a home based business or one located in a warehouse district. There are other factors and plenty of formulas out there, I recommend starting somewhere in the middle, say 6% and then adjusting higher or lower as needed.

If your advertising is successful, and sales increase, this method offers the ability to grow your business. More sales results in a bigger budget, which results in more sales, which results in a bigger budget, etc.

Here’s one method that is not on the list above. I call it “The Comfort Level Budget”.
For small businesses currently without a specified advertising budget, finding the fiscal discipline to allocate funds for advertising every month will be difficult. Remember the old saying, “…every journey begins with the first step”. The important thing is to take the first step and establish a small budget, even a very modest one, and then be consistent.

The danger with this approach is that small budgets usually yield small results. Owners or mangers can get discouraged. One must be committed and gradually increase the budget until results are measurable.

A final thought. There is more homework to do.
It’s great to become an advertising budget expert and allocate funds to grow your business. However, at the same time, you have got to become an advertising expert too. A budget is important, but if you are spending funds on advertising that isn’t working, you’ve got a problem. Results must be measurable. Learn as much as you can and rely on expert advise from media representatives.

In the end, no one knows your business better than you do. You know your cash flow and profit margins. You are in the best position to measure the results of your advertising. Start growing your business today. How much is your budget?