What Should You Spend on Advertising?

It’s an interesting question for every company. See what your rivals are doing, and then think about what’s going to be effective.

hiqbvmruu6 – One of the questions I’m frequently asked is: “How much should my company spend on marketing and advertising?” It’s a conundrum that vexes many corporate leaders, from emerging entrepreneurs to seasoned CEOs. Unfortunately, instead of seeking a rational answer to the question, many of them just ignore it and hope it will go away.

As a rule, emerging companies focus most of their time and talents on meeting the needs of customers, as well they should. If they don’t take care of the customers they already have, everything else will be academic. Strangely, however, many neglect the function of winning customers in the first place. Others naively assume that if they simply provide excellent products or services, their reputation will precede them. Call it the “build a better mousetrap” syndrome. But the world has too many other things to do with its time than beat a path to your door. That means you need to structure your profit-and-loss statement in such a way that you can profitably allocate a reasonable percentage of your revenue to marketing.

The Big Question: How Much?

While there is no definitive answer as to how much any business should spend on marketing, there are general guidelines any company can use to develop a formula that works for them.

Your first step should be to try to find out what the advertising-to-sales ratio typically is in your field. Public companies in your industry may give a figure for their marketing spending in their financial statements (found in their annual reports). With a simple calculation, you can figure out what percentage of their overall revenue that represents. If you can’t find any public companies that seem similar enough to yours, you might want to start at 5% and then adjust your projected spending up or down based on the size of your market, the cost of media, what you can learn about how much your competitors are spending, and the speed at which you’d like to grow.

You’ll also need to ask yourself if your business is built to leverage volume or to leverage margin. Even within industries, there are substantial differences in the marketing spend of volume-driven companies compared with margin-driven ones. Volume-driven companies tend to spend a tiny percentage of sales on marketing, in part because their large revenues enable small contributions to add up fast, and in part because of the margin pressures they face in having to compete with other high volume companies. By contrast, margin-driven companies tend to spend a larger percentage of sales on marketing: They have room in their margins to afford it, and they’re often working from a smaller revenue base.

The retail industry provides some good examples. While Wal-Mart (WMT) might spend a meager 0.4% of sales on advertising, the sheer size of the company turns that tiny percentage into a significant budget. Wal-Mart’s nominally higher-margin competitor, Target (TGT), spends closer to 2% of its sales on advertising, while Best Buy (BBY), as a specialty retailer, spends upwards of 3%. Finally, more upscale stores like Macy’s typically spend on the order of 5%.

The same kind of ratios can be seen in the car industry (automakers’ generally spend 2.5% to 3.5% of revenue on marketing), liquor (5.5% to 7.5%), packaged goods (4% to 10%), and every other industry.

If you’re in a services business, you might want to bump your starting point higher than 5%. For example, like most professional services firms, my company is more margin-oriented than volume-oriented, so fueling its growth requires that we spend a higher percentage of our revenues. Last year, our number was just over 8%, and I’ve seen companies spend upwards of 15% when warranted—especially young companies that need to invest to build their brand.

Marketing, Not Just Advertising

It’s important to make a qualification here. Giant consumer corporations such as automakers, packaged food manufacturers, and retail chains spend a huge percentage of their marketing dollars on paid media advertising, the most visible (and expensive) tool in the marketing toolbox. Depending on the size of your company and the business you’re in, advertising might not be the right (and certainly not the only) tool for you.

A professional services company like my own is a good case in point. While we serve a national clientele, we are much too small to effectively advertise on a national scale. As a result, we don’t purchase paid media advertising. But we do have an aggressive marketing program built around tactics like direct mail, online marketing and public relations. For a variety of reasons, paid advertising might not be right for your company either, but events, vehicle wraps, point-of-sale displays, or other tactics certainly could be.

The important thing is intentionally and deliberately to set aside some rational percentage of your sales to get out there. That way, the question you have to answer isn’t “How much should we spend?” but rather, “How do we spend most effectively?”

Building a Successful Advertising Plan

Before you can advertise effectively, you need to answer these important questions.

Q: What do you think is a better advertising plan: $2,000 in direct postcards reaching roughly 3,500 people, or $2,000 in a newspaper ad reaching 750,000 readers?

A: It depends entirely on what you say in your ad. If your impact quotient is high enough, your best bet will be the newspaper. If the direct postcards are delivered precisely to “the perfect target” (which is not very likely), then the direct-mail route is preferable.

Based on the fact that I don’t know the answers to either of these questions, my guess is that neither the direct postcards nor the newspaper will work for you. My advice is that you keep your $2,000 in your pocket until you come up with an actual plan. These are the hard questions you need to answer:

1. What do you have to say that matters to your customer? I’m your prospective customer. I know you want my business, but why should I care? What’s in it for me? Most ads are written under the assumption that the reader, listener or viewer has a basic level of interest and is paying close attention to the ad. But customers tend to ignore all ads that do not speak directly to them. Your first task is not media selection; it’s message selection.

2. Can you say it persuasively? Most ads are ineffective because the writer was trying to say too much, include too much and be too much. Fearful of leaving someone out, these writers write vague, all-encompassing ads that speak specifically to no one. “We Fix Cars” is a terrible headline for an ad.

3. Are you speaking to a felt need? Let’s say the “We Fix Cars” auto mechanic has a great deal of affection for older BMW 2002s. He knows that 2002 owners love their cars like few drivers on the road and that the only weakness of the 2002 is its evil Solex carburetor. Every 2002 owner knows this, too. So he writes the headline, “BMW 2002 Owners: Aren’t You Tired of Fooling With That Solex by Now?” In the body of the ad, he talks about the fabulous new Weber two-barrel carburetor now available for BMW 2002s, raves about how it dramatically increases performance and reliability, explains that he keeps these new Weber carburetors in stock at his shop, then names the price at which he will install and adjust that carburetor for you. He closes the ad by saying, “You’ll rocket out of here in a completely different BMW than the one you drove in.” If a list of BMW owners in your area is available for a direct-mail card (such as the list from the local BMW club), then a direct-mail card or flier would be the way to go. But if no such list is available, the newspaper might be a second choice. In either case, you’d want to include a large picture of a BMW 2002 to serve as a recall cue and help gain the attention of your target customer.

4. How long is your time horizon? Some ads build traffic, some build relationships and others build your reputation. If you don’t have the financial resources to launch a true branding campaign focused on building relationships and reputation among potential customers, you’re going to have to settle for traffic-building ads until you can afford to begin developing your brand. To what degree do you have financial staying power?

5. What is the urgency of your message? If you need an ad to produce immediate results, your offer must have a time limit. This technique will simultaneously work for and against you. On one hand, customers tend to delay what can be delayed, so limited-time offers generate traffic more quickly since the threat of “losing the opportunity” is real. On the other hand, customers have no memory of messages that have expired; short-term messages are erased from our brains immediately. Therefore, it’s extremely difficult to create long-term awareness with a series of limited-time-offer, short-term ads.

6. What is the impact quotient of your ad? How good your ad must be depends on the quality of your competitors’ ads. A .22-caliber pistol is a weapon against an opponent with a peashooter. But aim that pathetic pistol at an opponent holding a machine gun, and you can kiss your silly butt goodbye. How powerful is the message of the opposition? If your competitor carries a machine gun, don’t go where he goes. In other words, don’t use the media he uses.

7. How long is the purchase cycle? How long it will take your advertising to pay off is tied to the purchase cycle of your product. Ads for restaurants work more quickly than ads for sewing machines, because a larger percentage of people are looking for a good meal today than are looking for a machine that will let them make their own clothes. Likewise, an ad for a product we buy twice per year will produce results faster than an ad for a product we buy only once a year. Remember, a customer first has to be exposed to your ad often enough to remember it, then you have to wait for that customer to need what you sell. How soon will he or she likely need it?