How Much Should You Spend on Advertising?

There are so many variables, it is extremely difficult to make generalizations about advertising and marketing budgets.

There are some things we can say that may be helpful. Advertising can range from a high of as much as 35% of sales down to about 2% of sales.Liquor, for example, is a potentially highly profitable business and a competitive one. The product is somewhat an emotional purchase and can be influenced by style, number of impressions and a certain specific image. So liquor could be in the range of 15 to 20%.

Procter and Gamble, not an inconsiderable-sized company and one whose product management is legendary, depending upon the definition of “sales” uses a figure in any given year that ranges from something above 9% on the low end to 10.5 or 10.8% on the high end. Of course the larger the company the less a company can spend if it decides it will or must.

On the other hand, the start-up company or the smaller company competing with a bigger, older, more established corporation may need to outspend them for some time in order to establish a solid share of market that will not evaporate at the first sign of trouble. We often see recommendations in the 2% to 5% range. By themselves these percentages make no sense at all.

Inc. Magazine has surveyed a number of their top 500 growing businesses and the number comes out to about 10% of sales. In these companies, sales is usually defined simply as all revenues. If revenues are $50 million, then the budget is $5 million. Simple as that.

What about business-to-business advertising? Unlike a large consumer company, such as Procter and Gamble or Smirnoff, a business-to-business company with a defined number of business customers may and probably will spend less as a percentage of sales.

In addition, business-to-business marketing will often involve much less media and much more promotion and sales support material in the marketing mix. They may include a wider range of features, such as direct mail, trade shows, telemarketing, and customer service in addition to the media advertising.

When budgeting for a marketing campaign or an annual marketing plan, sometimes it is a good idea to look at the budget from an advertising and marketing perspective before setting the price. There are a lot of factors that go into planning a marketing campaign and just as many that make it successful. So you cannot be rigid.

We are not talking about the original cost of advertising, marketing and sales. Those things are part of overhead. We mean that after the price has been calculated, other things, such as competitive advantage, compatibility with product line, industry practices on discounting and turnover factors should be looked at one more time.

Example: Let’s suppose that your products are sold at only one time of year. Your industry has a major trade show at which a high percentage of the year’s business….let’s say 75%…is transacted. So this annual trade show is a make-it or break-it situation. It is also an indication that you have a seasonal marketing situation. In other words, your marketing budget must be focused around that period of the year when buyers come out. That is your post-production, post-administrative factor. This comes after everything else, and modifies everything that has already been calculated.

A number of industries have this characteristic. Toys is one example. Apparel is another. A large part of the retail industry makes 70-90% of its sales in the period from Thanksgiving to December 24th. Their buying period is anywhere from 3 months to as much as a year in advance.

There are something like eleven different buying seasons in retail. There are sub-seasons. For example, the Fall could be divided into: Back-to-school, Mid-Fall (October, November) and Christmas. If your average buying schedule is 6 months in advance, you have three specific sub-seasons to consider, and the lead time for each one may be different. Each sub-season may require a different promotion. If you are budgeting seasonally, you need to take into consideration sub-seasons and lead times.

You can budget by product. This is an excellent method because measurement becomes much easier. Measurement is extremely important. If you do not know whether your marketing itself resulted in 1 out of 20 sales or 1 out of 50 sales, you are already handicapped. Measurement is not easy, but it is easier than going out of business and starting all over.

Let’s say that cost of manufacture of a given product is $3.00. Overhead is $3.00, including a piece for advertising and marketing. And cost of goods is $3.00. Total costs are $9.00. Let’s say that the product sells for $24.00 at retail and your wholesale is around $18.00.

Purely theoretically, you have the potential to spend up to $9.00. If your projected sales for the product during this period, including turnover perhaps once, just for argument, is 50,000 units, then your max budget is $450,000 on wholesale revenues of $900,000.

Of course you will not budget $450,000. But you can see that your marketing budget can be a great deal more than a simple 5% which would be $45,000. The difference is so great that the two numbers don’t even compute. It looks like a mistake. But it isn’t. The object of the exercise is to sell the product, to achieve as many transactions at full price as is possible in the time frame allotted.

So where do you go between zero and $450,000? This is where you look for all the external factors. What is the competition doing….price, promotion, any known sales? What is your best estimate of the total market universe…how many units does the market want and need? What are your competitive advantages and weaknesses? Rank everything and create quantitative percentages and give those percentages a dollar value of marketing.

Bring all of the numbers back to the product. That is divide your budget number by the number of projected sales. Each product carries a promotion value, an eventual share of the marketing budget. Now you can begin to determine how much you will spend for 5,000, 50,000 or 100,000 units, with the marketing budget pre-loaded.

Each unit carries its own unit promotion or marketing cost attached. Start low and work up. You can always increase expenditures, but this will keep expenditures close to reality. Because you have your number attached to the unit, calculation will be easy. This is one way you can do it in product management and this is a sensible way to do it in any product line. The key thing with this method is that you will almost never be caught short.

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