Calculating Your Advertising Budget

Q: We operate a small retail business with sales in the $2,500,000 per year range. What is the average percentage of gross sales that a company in our sales bracket should be spending annually on advertising?

A: To answer your question, there are several schools of thought on this and to a degree will depend on many factors including but not limited to your competitive market, your industry and the cost of media in your market, but the best rule of thumb calculation that I've come across I attribute to a fellow advertising professional named Roy Williams.

1. Take 10-12% of your annual sales. (10% if few if any competitors advertise, 12%in a more competitive environment)

2. Multiply by your average mark up above cost of goods sold. IE.. if you buy an item for $2 and Sell it for $4 your markup is 100% ( Profit= $4-$2 = $2 Markup $2[markup]/$2[COGS] = 100%)

3. Subtract out your annualized Rent (or if you own, your commercial mortgage payment) - This nicely takes into account the age old realestate addage.. Location... Location... Location. In other words if you pay more for a high traffic street corner location in a downtown area you'll need to advertise less than someone tucked away in the back of an industrial park.

So for example taking your $2.5 Million in sales into account and a less competitive environment we'll use a factor of 10% which leaves us with $250,000.

Let's guess that your in hghly competive retail environment (ie competing against web retailers and your manufacturers) and are only managing a 50% Mark up(as defined above). now we're down to $125,000

Let's say your monthly rent is $5,000 (this is a total stab in the dark since i don't know where you are) which means your annual rent is $60,000

This would leave $65,000 per year to advertise with.

Obviously you're going to want to plug in your own numbers to get a budget for your circumstances.