When it comes time set up a budget for your advertising, I have a simple rule of thumb: whatever it takes.
Okay, maybe I'm being a bit flippant, but after three decades in advertising that's almost the best I can do. I could give you the standard answer that most marketing textbooks offer. An average business should allocate about between two to five percent of your gross revenue. A startup or new business might have to do double that the first year or two. Let me amend those figures and walk you through a few companies that don't meet these numbers.
During the heyday of AT & T, they only spent about one percent of their income on advertising. But, in the sixties and seventies, they were making a billion and a half dollars annually. So their advertising budget was $150,000,000 a year. That's still a staggering amount. I read somewhere that many major companies spend about twenty percent of their anticipated gross, during a campaign to introduce a new product into the marketplace. Here are some other industries and their allotted percentages as expressed in very general terms according to some current advertising journals' statistics:
Auto Manufacturers: Up to 1%, Retail Stores: 2% to 3%, Service Businesses: 3% to 5%, New Business Startup: 5% to 7%, Fast Moving Consumer Products: 8% to 10%, Pharmaceutical or Cosmetic Companies: 20% and up.
But suppose you're not Revlon Cosmetics and, instead, your business is cleaning carpets: so where do you fit in? It depends. It's all about the mystical, magical ROI, once again. If you're the new guy in town, odds are you will need to do the most advertising to establish your name and identity among the other carpet cleaners. Unfortunately, it means the outlay of sizeable marketing dollars to compete with existing ads. They, after all, have already earned their place by their longevity. You have to break into the heading with a large ad to draw customers that ordinarily would migrate to the older competitors.
And it probably couldn't have come at a worse time for you. You've just invested in trucks, equipment, perhaps an office and that overhead, employees, insurance, signage, accounting and licensing fees. It's outflow without any inflow. Yet now you are expected to cough up even more money for a marketing campaign. It's just about this time that many new businesses say they're tapped out and opt to bypass the Yellow Pages. It's just too darned expensive, they moan. But, a smart businessperson would have allowed for this expensive in the original business plan. You do have a business plan, right? You don't? Shame on you!
Assuming you have some basic strategy for your business, then you should have an advertising allotment. It's as important as a sign on the front of the building or on the truck. It would include those items plus any direct mail, Yellow Pages and any other appropriate media. If you're a retail business, try the two to five percent of anticipated gross sales. If you're a service provider, go with four to ten percent. Then double that for the first year.
This is a general rule of thumb. There are so many factors that affect the outcome of a campaign, I hesitate to set down a firm number. What if you use a figure I mention for a year and have a miserable result? Did you over or under spend? How do you know? I will bet that most business failures are due to a lack of an, or under-funded, advertising program. I remember how many of my customers cut back their campaigns during recessionary times. This is exactly the reverse of how large corporations view a downturn in sales. They realize that they must increase their marketing in hard times. It may be counter- intuitive to a small business to spend more when profits are down, but it's the same as playing the stock market.
When a stock is soaring, do you buy when it's peaked or when it starts dropping? Most amateur investors will jump on the bandwagon of a climbing stock, thereby forfeiting almost any chance of a profit. The smart investor will buy the so-called, "bottom-feeders" because they are the best potential profit-makers and have the lowest cost factors. Again, the counter-intuitive approach works every time.When determining a budget, a change in mindset is in order. Rather than looking at advertising as an expense, consider it as an investment. Many businesses think of marketing as an overhead expense. That may be true of your insurance, rent, utilities, employees, accountant and legal fees, but advertising is the only service that can actually bring in customers. None of the other aforementioned items can make a sale. With the exception of a commissioned salesperson, the remainder of these overhead expenses are always outgoing only. So you have to reevaluate your advertising strategy viewing it in the proper light: an investment that helps provide cash-flow.
After many years of YP consulting, one thing stood out above all others. The idea that a business's ad was a necessary evil which drained the company of profits and was quite over-priced. I never heard a customer remark how cheap his YP ad appeared to be and how happy he was to write that monthly directory check. Even when times were good and they knew the ad was getting them calls, the expense was painful. What would be even more painful would be to close a business due to a lack of sales.
I used to compare a YP ad to a business sign. Most retail stores recognized the need for letting the public know that ABC Auto Sales was open for business and spent huge amounts on massive signs around the property. But, when it came to their YP program, their invariably asked what the smallest ad would cost. I would say that perhaps they might consider reducing their signage to a tiny, one by one foot size. Of course, that would cause them to become indignant. The whole idea was laughable to them and why should they even consider such a stupid suggestion? The poor owners didn't make the obvious connection.
So they would budget for a neon-illuminated monstrosity that would put a Vegas casino to shame and yet have a pittance remaining for the directory. When I explained how few people drove around town looking for the Auto Sales sign, they would justify the investment by saying how many customers came in because they said they saw the sign. I was happy for them but pointed out that placing a sign in front of every person actually seeking out a business would be an even better investment. Where could they do that, they wondered. Hmm. How about under the heading of "Automobiles-Dealers" in the Yellow Pages? Sure, they would have to forgo the flashing lights, but think of all the electricity they could save.
My long-winded treatise is to convey one hypothesis: have a plan. Cover all the essential areas of the business. Even if you decide that the directory is not your ideal form of promotion, make sure that your advertising program is well funded and part of the overall business scheme. Also, have a multi-year strategy that allows for future growth and marketing, unless you have figured you'll be closing within the first year or so. In that case, save your money and go on a nice vacation instead. After all, a company that "fails to plan, plans to fail," or so it's been said.
by Jeffrey Hauser