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.

Advertising in Richmond

Q: HelloDue to the slowing economy I am looking into advertising for the first time in approx. 25 years. Needless to say I have no money in the budget for advertising. All we have done in the past is yellow pages. I have an ad in the June issue of Richmond magazine and have talked to 2 radio stations that I feel reach the type of customers we usually deal with. That is generally college educated professionals. Middle to upper income. We get some doctors and lawyers as well as management people. Some retired customers also.I feel I can only run ads on one station so I could use some help there as well as any other advice.The 2 stations are WRVA 1140 - and WMXB 103.7.Any advice will be greatly appreciated.Thank you,

A: Regarding your question, I assume you're asking my advice on media choice. The Magazine may be a good choice especially if you're able to show your craftsmanship.

Regarding your choice of radio staton let me first say that far too much emphasis is typically placed on demographics. Don't get me wrong, they are obviously important, but most radio station formats today(with a few exceptions) are programmed to target adults 25-54 so you can safely advertise on just about any of them and still hit a sufficient number of "college educated professionals" to make a positive impact on your business. The question becomes, which of all of the stations in Richmond is the most efficient at reaching a sufficient number of prospective customers. It may be one of the two stations you've selected it is just as likely not. Ultimately it may not even be a station you'd think of. To be sure you'd have to shop around and get proposal from most if not all the stations in town. Most business owners make the mistake of advertising with the first salesperson that walks through their door.

Allow me to suggest an option you may not have thought of. Your local cable system makes advertising available on several of it's channels. Given your product/service HGTV or DIY Network.

Now, since you specifically asked me about those two particular stations, I'd lean towards the News station over the top40 station as people tend to pay attention to the news closer than they do to music, and the advertising breaks tend woven into news stories into short 1-2 Minute breaks so people tend to listen through them as opposed to the longer 5-7 minute advertising breaks on a music station.

Hopefully this will help you in your evaluations.

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