Any business, if it wants to grow and increase profits, needs to invest in advertising. But how to do it right, what do you need to pay attention to, and which mistakes can be avoided? Today we talked about this with a seasoned entrepreneur and founder of an international advertising agency ADSbase, Denis Lagutenko.
Why is it important to plan the advertising budget?
A properly calculated advertising budget is the key to success for any advertising campaign.
If you’ve never done any serious ad budget planning, it can cause you some problems when launching large-scale campaigns.
The main risks here are to invest more than necessary or to spend not enough for achieving your marketing goals. Sometimes the amount you are willing to spend on advertising a product may be different from the actual budget that will help you reach your targets and bring you the desired profit.
What do I need to pay attention to when planning my advertising budget?
To understand what advertising costs will be optimal, it is necessary to take into account favorable and unfavorable market conditions, which in some way will affect the amount of required investment.
You should especially pay attention to the specifics of your market and the competition in this sector. Based on this, you can imagine what frequency of advertising you might need.
It is also important to understand at what stage of the life cycle your product is in. All of this directly determines the necessary costs, no matter what method you use to calculate the overall budget.
And what are the methods for calculating the advertising budget?
There are several.
You can calculate a budget based on expected sales, in which case the budget is a percentage of anticipated revenues. For accurate planning, in this case, you need to have historical data to better understand the relationship between advertising and revenue. Companies typically spend between 2 and 10 percent of their revenues on advertising, depending on the line of business and some other factors.
The second method is the competitive parity method. This is a common strategy used by companies that do not want to fall behind their competitors. When there are clear leaders in an industry market with relatively similar performance, this approach seems appropriate.
This method assumes that you calculate advertising costs based on the approximate cost of your competitors. However, a budget of a similar amount does not guarantee the same result.
Plus, this approach has other limitations, because it is not always possible to calculate exactly how much your competitors spend on advertising.
You can budget based on the overall marketing goals of your company – this method is called the goals and objectives method, but it only makes sense if your advertising budget has no significant limitations. Large corporations usually plan their budgets this way.
Which of these methods is best for a regular, medium-sized business?
The optimal method would be to calculate based on a percentage of sales, because businesses generally have a limited budget and need to control the effectiveness of advertising campaigns – no one wants to advertise at a loss.
The other two methods are more situational and advanced, each of them has its difficulties in calculating, while the percentage of sales is a simple and measurable metric.
I settled on a method and started calculating the budget. Where do I start?
The first thing you need to do is to calculate the minimum and maximum amount you can spend on advertising. That’s how you do it:
Start by taking 10% and 12% of your projected annual gross sales and multiplying each amount by the markup made for your average transaction. At this point, it’s important to remember that we’re talking gross markup here, not margin.
Markup is the gross profit over the cost of production, expressed as a percentage of the cost of the product. Let’s say you sell a unit of your product for $150. Assuming its cost to you was $100, your markup would be 50%. After 10% and 12% of your projected sales have been multiplied by the markup, you get two adjusted amounts.
Then subtract the annual cost of the facilities (rent) from the adjusted 10% and 12%.
These amounts represent the minimum and maximum advertising budgets for the year. These amounts may surprise you, because at that point you may find that you have already spent your advertising budget on expensive rentals. Or you may find that you have more money available for advertising than you thought.
Why do these metrics affect the advertising budget?
It is simply impossible to determine optimal advertising costs without taking into account product markup and rent. Some advertising experts argue that the amount of the advertising budget can simply be counted as 5-7 percent of gross sales, but this is a serious misconception.
If you rent an office with high visibility in the city center, it is also a kind of advertising. A company that has a great office and a noticeable display can reduce its advertising costs. Because it is generally more visible than a similar company located in a less convenient location.
This is why rent, on a par with the profitability of your average sale, makes a big difference.
And which of these two approximations should you aim for?
Based on circumstances. This method shows your room for maneuver, the rest depends on how much you are willing to spend on advertising. Many people prefer the golden mean and choose the arithmetic mean between the two extremes.
What is the usual planning horizon for the advertising budget?
As a rule, the advertising budget is calculated for the year ahead.
How precisely should you plan the advertising budget?
Advertising costs are hard to predict; on the one hand, we want to maximize profit, but on the other, we will not give up opportunities to save money where possible. So if the business is booming, advertising costs can be reduced. The main thing is to have a framework in front of you in which you plan your advertising spending.
It can be difficult to determine the potential profit from your business, because its profitability depends, among other things, on advertising. That’s why planning is so important – unlike uncoordinated marketing efforts, you rely on real indicators, and regular work and analysis in this direction increases your chances of higher profits.
Denis Lagutenko is a founder of the digital agency AdsProfit and the integrated communications holding ADSbase. He is an expert in affiliate marketing, Forbes Council member, a speaker of international conferences Synergy Digital Forum. Denis also has an instagram account with over 450k followers, where he shares his insights on business and advertising.