Determining How Much You Can Afford to Spend

So, what dollar amount, or percentage of gross sales, should you invest in your advertising budget? The question is a very tough one. And although I can give you some guidelines, only you are able to answer it when it’s all said and done. After all, it’s your money.
A good place to start when you’re setting a budget is in examining your goals. If you want to become the Big Dog — that is, if your driving ambition is to elevate your business into an industry-leadership position and blow your competition away — then of course you need to spend a lot more money than if you’re satisfied with just getting by. In this blog, I make the assumption that you want to do much better than just getting by — you wouldn’t be advertising at all if you didn’t want your business to grow and prosper. But in order to see the kind of success you’re after, you need an ad budget.
Over half of new businesses fail within their first two years. This depressing statistic is probably due to a number of factors, but a lack of working capital (cash) is usually at the top of the list. Most businesses start out with great hopes and limited cash, and it’s the hand-to-mouth reality of a start-up that kills most of them. When people open new businesses, they often forget to set aside enough money for a large enough ad budget to get their name out there. You can invent a better mousetrap, but not having enough working capital to afford to tell the world about it is like trying to tow a boat with a rope.
To get an idea of what typical businesses spend on advertising, I asked several of my agency’s clients what percentage of gross sales they spend. Not a single one of them could give me a straight answer to my question. They had each used a different formula to arrive at their budget number, and they each planned their advertising expenditures, using different criteria.
Our agency has one retail client who spends as much as 10 percent of gross sales on advertising. Although this percentage may seem high, some businesses must spend that amount in order to compete, and I’ve worked for clients who spent even more. On the other hand, I’ve seen businesses spend 2 percent or less on advertising — and in the case of very small companies, some don’t spend even that much on a sustained basis. Most small businesses spend between 2 and 7 percent of their gross sales on advertising, though some allocate as much as 10 percent.
Percent of gross is a very helpful budgeting tool, but it can leave a start-up business with inadequate exposure. Start-ups often must budget a percentage of projected gross, overspending in the introduction of your business to build business to a profitable level.
You can use these figures as general guidelines to help you set your own advertising budget, but keep in mind that each business is unique. What works for one company may not work for another. When in doubt, follow this simple rule: Spend as much money on advertising as it takes to make and sustain an impact in the marketplace, but don’t spend so much that you run the risk of putting your business into financial jeopardy.
You can begin the process of setting a budget by trying to come up with some answers to the following questions:

• How big is your business?
• How much yearly income does your business generate?
• What do you want to accomplish with your advertising, and how much will that cost?
• What is your competition spending?

If you’re in a highly competitive business, such as cell phones, restaurants, clothing boutiques, or car sales and repairs, you need to step up to the plate with some serious bucks in order to hit a homerun in your marketplace. Your competition is spending their brains out, and you have to do the same. On the other hand, if your business enjoys a unique status in your market, if you provide merchandise or a service that people can’t find elsewhere, then you can get away with much lower spending.
If your budget is too limited to make an impact in the market on a daily or weekly basis, stash your cash until you’re having some special event or sale and then attack the media full-force. In advertising, you’re better off having a big voice once in a while than a weak voice every day.