Advertising Budgets: How Much Should I Spend?

It’s the ancient question most business owner ask themselves at some time: How much should I spend on advertising?

“Well, What’s your Budget?” gets asked by thousands of media sales reps since the dawn of time, and I have even asked this quite a few times myself in my career. It’s not a bad question – in fact it’s helpful towards building an advertising campaign to know how many layers the advertiser can afford.

But that doesn’t make it any easier to answer. I’m pretty sure every business owner simply wants to yell out “As Little As Possible For It To WORK!” Don’t worry – that’s actually a great answer! How much to spend on advertising differs greatly by industry, annual sales, and even how much your competition is advertising. Even though there is no ‘one size all fits all’ formula to figure out how much you should spend – fear not – there’s a way to get there.

Some time-worn models say that 5%-10% of gross revenue should be spent on advertising – but that’s a sweeping generalization that doesn’t account for your unique mark-up, cost of sales, or your existing visibility of your business! For example, if you own a business in the mall – your rent already goes towards your marketing. A financial adviser, who mainly invests his/her time has very different cost of sale than a flooring store who must first deduct the cost of their materials before using any of the ‘net’ sale to pay operating expenses.

Roy H. Williams has a simple but effective approach, starting by generating comfortable minimum and maximum ad spend levels. It’s got some math, but it takes 10%-12% of your annual gross sales, multiplied by your mark-up (not margin), minus your rent. The results represent your minimum – maximum ad spend range, and is a pretty decent formula to start with.

With Online advertising specifically, you can calculate budgets even more effectively. We can determine your conversion ratio, or the percentage of people that go to your website that become customers. Let’s say 3% of traffic to your Tractor Sales website becomes a customer and buys a $2,000 product. We can then determine that generating 100 leads to your website yields on average 3 customers, and $6,000 in revenue. Subtract your cost per sale and the ad spend, and you’ve yielded an accurate ROI. Rinse and Repeat.

Smaller businesses need to start small and that’s okay. The Tomlinson Agency helps all sizes of advertisers determine that ‘sweet spot’ for their advertising budget! Call us today for a free consultation – I’d love to talk!

-Matt Tomlinson, CEO / Founder – The Tomlinson Advertising Agency