How big should my advertising budget be?Kiri Tamte-Horan
When working with our clients, we are often asked how much they should be spending on advertising. Many companies spend a certain amount, but few know what that amount should actually be for what they do. The short answer: it depends. There are a few factors that should be considered before setting aside money for advertising purposes. I will go over a few of these factors as well as some industry averages in order to help you figure out where you should be at with your ad spending. Of course, when working with Vici, you will always receive a tailored strategy that makes the most of the ad dollars you do end up spending. Let’s begin.
One of the most common ways to decide on an advertising budget is to create a marketing-to-sales ratio. This is something that can be decided upon and then either increased or decreased each year/six months. Let’s first figure out what your current ratio is. Take the amount that you currently spend on advertising, marketing, brand awareness, search engine optimization, etc., and divide that by your annual revenue. Once you do this you should get a decimal which can represent your ratio as a percentage. For example, if your company spends $500,000 on advertising with an annual revenue of $10 million, your ratio would be 20 to 1 or 5%. That’s not too bad. But let’s take a look at some averages.
Listed below are the average percentage of annual revenue spent on advertising per industry. This data was gathered by Schonfeld & Associates.
- Apparel and other finished products: 4.8%
- Dolls and stuffed toys: 10.4%
- Educational services: 10.7%
- Electronic housewares: 4.3%
- Footwear: 4.2%
- Furniture stores: 9.5%
- Household audio and video: 7.0%
- Jewelry stores: 6.7%
- Perfumes, cosmetics, etc.: 20.1%
- Soap, detergent, etc.: 12.1%
- Transportation services: 24.6%
- Women’s clothing: 8.8%
As you can see, the average varies widely depending on the type of industry with services and luxury items spending more than clothing and necessities. In most cases, it is easier to sell products that people are already accustomed to buying. This is why luxury items need larger budgets. While comparing your ad spending to your industry average is helpful, there can be other reasons to increase or decrease spending. For example, if there is a major shopping holiday coming up, you may want to increase your budget to help keep your brand on the minds of those shoppers. You may also want to achieve certain goals with your advertising, such as increasing the amount of a certain type of customer (wealthy, out-of-state, return customers). And finally, if you are a smaller business, you may want to set aside just enough money to keep yourself afloat while putting the rest towards advertising. Each of these methods have an upside and downside, that should be carefully examined before making your decision. Don’t forget that there may be additional advertising dollars available to you depending on what products and services you are advertising. To find out more about Cooperative Advertising, check out this article.
A big thanks to 60SecondMarketer for all of their insight.