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How much should a business spend on advertising

how much should a business spend on advertising

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Industry Factors

Researching your industry can give you clues on what kind of advertising you need to compete in the marketplace. How much are your competitors spending on paid advertising and where are they spending it? What percentages of their revenues go into their advertising budgets? You might need to consider your sales goals, your company's costs, sales trends in your industry, the size of your market and the price media is charging for advertising that reaches your market before you find the minimum dollar amount that makes for an effective advertising budget.

Percentage of Sales

The percentage of sales approach to figuring a budget is common with small businesses. "Bloomberg Businessweek" suggests starting with a minimum budget of 5 percent of your annual projected sales and then adjusting your actual spending up or down as you go. "Entrepreneur" magazine's website offers an in-depth formula that suggests calculating a minimum of 10 percent -- and a maximum of 12 percent -- of your projected annual gross sales multiplied by your average mark-up percentage per item sold minus the annual dollar total of your location's lease costs. "Entrepreneur" insists, "It simply isn't possible to designate a percentage of gross sales

for advertising without taking into consideration the markup on your average sale and your rent."

Other Formulas

One way to figure a reasonable ad budget is to design one specifically to meet your business goals. This approach might suit you if less than 10 percent of your projected sales is not likely to help you reach the level of market share and business growth you're planning. Mimicking your competitors is another approach that "Inc." magazine's website calls the "competitive parity method." Of course, making every dollar count can be essential especially for businesses still in the start-up phase. Businesses use the "affordable method" when, according to "Inc." magazine, they simply "base their budgets on what they can afford."

Tips and Warnings

The U.S. Small Business Administration, SBA, points out that, when it comes to advertising budgets, "Keep in mind that whatever amount you allocate will never seem like enough." Advertising budgets can burn up fast and resulting sales can be slow to come. The SBA suggests taking a long-term approach to advertising and making sure you understand how well your advertising fits in with your other marketing efforts, such as direct selling, networking online, creating partnerships with other businesses or generating publicity.

Category: Personal Finance

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