Advertising Budgeting

 There are two ways to set a budget for your advertising campaign:  

 You can ask yourself what you can afford to spend,

  or,

 You can calculate the investment needed for your advertising campaign in order to generate the sales required to make your business successful.  

 Let's say that again: Your advertising must generate the sales you need to stay in business. You must budget for it. Anything short of that is a complete waste.

[Note that Budgeting For Your Advertising Campaign, Advertising Planning, and Using Media More Effectively should be read together.]

Honesty Is The Only Policy in Business

 It’s time for some real honesty for people new to self-employment.

 Probably all of your company’s revenues come from your marketing. That means that your marketing plan is probably the most important document you have. Your advertising campaign is just as important as payroll and rent and taxes. Advertising is not an option. It is not an extra expense that can be cut. If you cut your advertising campaign, your business will die.

 The number one reason why businesses fail is because of poor management. Normally it’s poor financial planning. Management fails to create a budget. Management fails to do cash flow estimates. Management selects a location based on what they think they can afford instead of what will generate the traffic they need. Management extends credit to new customers. Management sinks cash into long-term financial commitments. And management does not set a sustainable advertising campaign budget.

 And yes, this applies to all of the business school graduates out there. The business failure rate among MBA’s is almost as high as among everybody else. Almost 1 MILLION businesses fail, go bankrupt, or terminate every year in the United States. Don't let it happen to you.

Budgeting For Your Advertising Campaign

 If there is a golden rule for running an advertising campaign, it is that you have to stick to it. Sustained Advertising = Recognition = Trust = Sales. Your advertising campaign is a long-term investment that takes time to show a return. Your budget must reflect this reality. Expect to run your advertising campaign for two to four months before your phone really starts ringing.

  When setting your advertising campaign budget, there are two costs to consider: production costs, and media costs. Budgeting for both is critical for success.

Advertising Production Costs

 We certainly do not want you wasting money on your advertising campaign. With that in mind, here is a fact that you should know:

 Companies that cut corners on advertising planning and production are wasting a large percentage of their budget.

 Quality advertising production costs money - all of it up front. But that cost is spread out over time. On an annual basis, production costs will only be a small fraction of your media costs. You don't want to buy expensive media space to run poor quality ads.

 Is high quality advertising production really worth it for your advertising campaign? 

 Let’s say you spend 5% of gross sales on your advertising campaign. If you expect $400,000 in sales this year, you have an advertising campaign budget of $20,000. 

 If you did everything right with your advertising, in theory you could reach your target market 100% of the time with the right message. But no company ever gets it 100% right. The question is, how much will you miss it by?

 What if half of your customers never see your ad? Or don’t immediately understand your ad?  Or don’t get the information they need? Or are insulted by it? What if they think that your advertising campaign is of a lesser quality than your competitors? What if you make the wrong offer, or sell the wrong benefit? 

 You will have wasted half of your advertising campaign budget – or $10,000 – in the first year alone.

 And there is more. What if you have a great ad, but you pick the wrong media, or use the media poorly? What if you pay too much for the media you are using? What if your client never opens your direct mail piece, or doesn’t get the right motivation? Good planning and design pays for itself many times over.

 Here is one more thing to consider: Good planning and production work have a long life span. Many companies never change their basic message and advertising. They start with professional marketing and production, and they use it indefinitely. This is normally a good strategy, assuming your advertising campaign is working.

 Make no mistake: Advertising planning and high quality production are critical to your advertising campaign. Professionally produced materials make you look good, and they bring you customers. That is what Professional Advertising is all about.

Setting A Media Budget

 Setting a media budget for your advertising campaign can be tricky, especially for new companies. But as you track and measure the effectiveness of your advertising over time, you will get a better idea of how much to budget to generate the business you need.

 Spending too little on your advertising campaign will cost you more than spending too much. You need to stay in front of your customers. A random or infrequent advertising campaign schedule equals wasted money.

 We can assist you with some industry guidelines, but as a general rule, we recommend that you at least match your direct competitors spending on advertising as a percentage of sales. 

 If you want to grow your business, you will probably want to invest more than your competitors are spending as a percentage of sales. [20% more would be a minimum starting point].

 In general, you will get a better response if you use more than one medium. A larger company will do better to spend money on some combination of print, mail, radio, Internet, outdoor, and/or television advertising than to spend the budget all in one place. For smaller companies, you will do better to spread your advertising campaign budget between print and direct mail to get the best return for your investment.  

 But there are no hard rules in advertising. Much depends on your products or services, and the relative effectiveness of each type of media for delivering your specific message. Please read Using Media More Effectively and Advertising Planning for more specific ideas on what media to use.

 You will also get a better response if you run smaller, more frequent ads. Don’t trade frequency for a one-time big bang in your advertising campaign. Don’t trade frequency in print for a less frequent television schedule.  

  Here are some of the methods companies use to set their advertising campaign budgets.

1.  The Percent of Sales Method: The advertising campaign budget is a constant percentage of desired sales. A car manufacturer may spend less than 1% of sales, while a small retailer may budget 3 -7% of sales. A jewelry store may budget 8 -12% of sales, and other companies may budget 20% or more.

 This method works as long as the advertising campaign budget is set as a percentage of desired sales. If the budget is set to actual sales, and sales drop, you do not want to cut your advertising campaign budget, or you will get caught in a downward spiral.

2. The Task Objective Method: How much money do you need to spend to reach the specific goals you have outlined for the advertising campaign? This is especially effective when you are starting out, or if you are trying to grow rapidly. Some advertising campaign strategies call for heavy spending upfront in order to win long-term customers.

3.  The Historical Method: How much did you spend to reach your sales goals in previous years or periods? You will find that by tracking your ads, you will know in advance what you need to do to accomplish your goals.  

4. Share of Market - Share of Voice: This method links market share to advertising expenditure. A company with a 20% market share would spend slightly more than 20% of the total advertising dollars spent in the market for that product or service. For new companies, expenditures would be 1.5 times the desired market share until that position is attained. [So if you want 20% market share, you spend 30% of total advertising dollars in that market until you get it].

5. Competitive Parity: With competitive parity you spend in equal amounts to your competitors as a percentage of market share. This is a self-defense method of budgeting marketing and advertising expenditures.

6.  The Combination Method:  The best advertising campaign budget you can set will be based on some combination of all of the previous models. You want to maintain a minimum level of advertising, fulfill specific goals, maintain your market share, keep up with your competitors, and compare everything to last year.

Here Are A Few Additional Questions To Consider:

How much extra can you afford to invest?

What unexpected opportunities have popped up?

What media deals or opportunities are available?

What new advertising campaign objectives do you want to attain?

What kind of growth do you want for your company?

Do you need to slow the business down a little?

What are your competitors doing?

Are there any new threats in the marketplace?  

Ask For Help

 Our goal is to help you to become a stronger, faster, smarter advertiser. By creating a sustainable advertising campaign budget, you will be well on your way. As always, Professional Advertising is here to assist you with accomplishing your goals. Your advertising campaign is just too important to take chances with. Please contact Professional Advertising for assistance.

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