Preparation of Advertising Budget

Advertising is an essential expense for any company. Determining how much you need to spend on a yearly basis can be difficult, particularly if you have a new company or you are exploring new advertising avenues. There are several means to determine how much money you should be spending on your ad budget. Keep in mind that as your advertising becomes more effective and more revenue is produced, you may need to revisit your budget to continue to foster growth within your company.

When you are a small or regional business, how do you know how much to spend on advertising?  Spending too little on your advertising plan is just as bad as spending too much.  A yearly budget must be determined, but should also be evaluated quarterly to make sure dollars are spent at the right time or around the right promotion.  At Media Venue, we counsel our clients on how to set an effective advertising budget based on the goals and objectives for their business.  Here are our 5 guidelines for budget setting.

Preparation of advertising budget

1. Review competitor spend

If your competition is spending a lot of money or your business category has a lot business category has a lot of competition, your advertising budget may need to be higher to break through the clutter.  If your budget is smaller, use the media that gives you the best bang for your buck.  If you can’t do it all, own one medium that will make the most significant impact.

2. Allocating a % of sales toward your advertising budget

An established business with consistent profits can set an advertising budget by a % of sales.  For instance, a small business with $500K in sales from 2016, could allocate anywhere between 5 and 15% to advertising in 2017. However, this amount would also be dependent on the business category, market(s), specific media cost, time of year (is placing advertising more seasonally), etc.

3. Set a Goal or Objective

Do you want to increase the overall traffic to your business? Do you want to grow your sales by 2%? Goals and objectives can require different media spend to accomplish. Be aware of what you are trying to accomplish and be realistic based on the amount of money you are going to allocate. It’s hard to grow your business by 10%, if your advertising budget is the same or less than the year before.

4. Know your limits

Know your max budget for the year and then allocate the dollars by month or quarter.  Media in the 4th quarter is typically more expensive than in the 1st quarter.  So if you are advertising all year, negotiate a better price in quarter 1 to allow more money for quarter 4.

5. Track Results

Are you tracking what dollars you are spending each month vs. what media you are buying?  There are ways to reach the consumer and get a good gauge on if your advertising is working:  promo code, “bring in this ad”, “say you heard us on WGG radio station”, etc.

How to Set an Advertising Budget?

1. Find out where and how your competitors are advertising. If you want to remain competitive within your industry, quite often your competitors will determine how much you spend on your advertising budget. See if they are using print, radio, Internet and direct mail, and then gauge how much money they are spending.
2. Set a fixed-price advertising budget if your business is established. Many companies find it easier to take a set portion of their sales revenue, typically between 2 and 5 percent, and put it aside for future advertising. If your company is new and does not yet have a strong revenue stream, avoid this method.
3. Use an objective-based method. This requires setting an objective for example, increasing your online customers by 10 percent and figuring out how much revenue it will bring in and the costs necessary to find and market to these consumers. This method is typically utilized by startups and companies who do not have enough revenue to support a large advertising budget.
4. Set a maximum amount that you wish to spend. This is a hit-or-miss method, but it will work for companies that have solid cash flow and/or reserves from which to draw. In this situation, decide on a total amount and then portion it out accordingly, such as “X” amount for print, “X” amount for Internet, etc.
5. Explore new avenues to determine effectiveness. To help determine how much money to spend on an ad campaign, test the waters before diving in. Pay-per-click and results-based marketing are prime examples of this technique. Set a small initial budget for advertising and then increase it as necessary.