Calculating your Ad Budget
How much do you spend on advertising?
Here's the formula my mentor Roy H. Williams, known as the Wizard of Ads, uses.
"Most business owners have been taught to budget approximately 5 to 6 percent of total sales for advertising and another 5 to 6 percent for rent, or cost of occupancy. This formula, however, often results in underperformance due to too little being spent on advertising. The business owner who spends only 1 or 2 percent of total sales on cost of occupancy is seriously underspending when only 5 to 6 percent is budgeted for advertising.
The purpose of advertising is to increase the exposure of your business beyond what is provided by your physical location. The business owner who saves money by investing in a weak location will have to advertise much more heavily. A high cost of occupancy for a landmark location is often the least expensive advertising your money can buy.
Although there’s no “one size fits all” formula for calculating the correct advertising budget, there is a concise formula for calculating the ad budget for retail businesses, and, in my experience, the formula can be easily adjusted to serve other business categories as well.
The following formula assumes a retail business with a 50 percent gross margin:
Step 1. Budget 10 to 12 percent of total projected sales for total cost of exposure.
Step 2. Adjust this figure by the store’s average markup (above cost of goods sold). If the average markup is 100 percent (“keystone”), then the formula is adjusted (10-12 percent of projected sales x 100 percent). If the average markup is only 91 percent, then the adjusted budget for total cost of exposure will also be reduced by 9 percent (10-12 percent of projected sales x 91 percent – see?).
Likewise, if the average markup is 150 percent, then the adjusted budget for total cost of exposure would be increased by 50 percent (10-12 percent x 150 percent.)
Step 3. Deduct your cost of occupancy from your adjusted total cost of exposure. The balance is your ad budget."
Have a look at how mark-up affects the ad budget.
So how much do you spend?
Morty Silber, CEO
Mad Strategies Inc.
a Wizard of Ads Partner
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