"How
To Budget For Success"
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 go
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?
Please note
that this chapter should be read with Using Media
More Effectively
and
Advertising
Planning.
Ask
For Help
Professional
Advertising
