What Percentage of Your Revenue Should You Spend on Advertising?
Far too often, small companies base their advertising budget on how much they feel they can afford. While a growing company shouldnít spend more on marketing than profits warrant, haphazard budgeting for marketing can be counterproductive over time. Instead, itís usually best to allocate a specific percentage of revenue for advertising.
The percentage of your revenues that should be spent on advertising will be influenced by the following factors:
1. Your type of business.
If you market to the public, youíre going to have to spend more than if you market business-to-business. Though television, newspaper, and radio advertising can be expensive, itís often vital for the ongoing profitability of a retail store or local service provider. While the actual percentage will vary among businesses, itís common for a new or growing company to spend 10 to 15 percent of the yearís anticipated revenue on advertising. As a business becomes better known, this percentage could be trimmed. But when doing so, owners should monitor revenues closely every three to six months to see if reduced ad budgets result in reduced revenue.
B2B advertising is usually more targeted than business-to-consumer advertising and can make use of direct phone calls, lower-cost industry-specific journal advertising, highly targeted direct mail, and catalogs.
In either case, itís important to experiment with the percentage you allocate to advertising. Donít be caught in the knee-jerk reaction: ďIíd never spend 15 percent (or 20 percent) of my revenue.Ē If youíre spending 10 percent now and find upping that to 20 percent increases your revenue by 25 percent, youíve come out ahead. Similarly, you may find that decreasing your percentage doesnít significantly affect your revenue. In this case, however, monitor revenues carefully to make sure they donít fall off gradually over time.
2. Your location.
Clearly, a store located in the heart of a bustling mall will need to spend a lower percentage than an out-of-the-way shop. A successful mall store may spend no more than 1 to 5 percent of its revenue on advertising (and in some cases less), while the same type of store thatís well off the beaten path may spend 10 to 15 percent.
3. Your competition.
If your main competitor showers the newspaper with ads every week, you may find yourself at a disadvantage if you stick your head in the sand. If youíre just entering the market and want to take business away from an established company, youíll need to spend a higher percentage. If an established business has become complacent and doesnít advertise, your aggressive marketing can be highly successful in a relatively short time. This is especially true if youíre in an area of growing population, in which new customers are entering the market area continually.
On the other hand, if youíre the established business and find that new competitors are using extensive marketing campaigns, you may have to up your percentage to maintain market share.
4. What you can afford.
A small company should not spend more on advertising than its profits demand. But in certain instances (such as when an aggressive new competitor is taking business from you), you may have to temporarily increase the percentage just to stay afloat. This could mean borrowing, taking money out of savings, or allocating more for marketing and less for other areas of your operation.
Whatever type of business youíre in, your business plan should contain provisions for your marketing budget. Ideally, it should be stated as a percentage of your anticipated yearly revenue. Start-up companies and companies revising their business plans should consult with their business advisors and seek counseling from industry associations or industry experts regarding the ideal percentages in various situations.