Four States Small Business Blog

Is Your Advertising Budget Too Low? Let's Break it Down

Posted by Mark Zimmer on October 23, 2017 at 8:00 AM
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advertising budgetBudgeting can be very tough for Four State business owners. You calculate your monthly overhead including your lease and utilities, then get to work projecting product costs, labor costs, taxes, and now all of a sudden, you need an advertising budget.

As a rule of thumb, most businesses fall into one of three categories when it comes to creating an advertising budget:

  1. Base the advertising budget on a percent of last year’s sales
  2. Base the advertising budget on a percentage of this year’s projected sales
  3. Decide from month to month how much to spend on advertising

We've discussed determining an advertising budget thoroughly before before and it's worth a read. Today we'll stick with these methods, and as a general observation, Option 3 is the riskiest approach.

Avoid Deciding Your Advertising Budget on a Month-to-Month Basis

When business owners decide from month-to-month how much to spend on advertising, they're always reacting to a previous month's sales. They're never in a proactive position where they can create an annual advertising plan for growth.

With month-to-month budgeting, the advertising budget often becomes a go to stash account. For example, you might dip into your advertising budget to print more forms when you've exceeded your office supplies budget. Or you might dip into your advertising budget for community donations or for a little league sponsorship. While these are worthwhile causes, they should not be viewed as advertising. Donations represent your involvement in the community, but were never designed to be high traffic drivers for your business.

A great way to take back control of your donations is to set a donation/sponsorship request date for your business. For example, you could select February 15th of each year. Each time you receive a donation request, inform them that to be considered next year, they'll need to submit their request in writing by February 15th. This will give you the opportunity to plan and create a donation budget instead of erasing your advertising one.

Break it Down

Once you've migrated away from the month-to-month approach, it's good practice to create an annual advertising plan and advertising budget. Once you have a figure decided for your budget, it's time to analyze it, or break it down.

Follow these 7 steps to break it down:

  1.  Determine what your average ticket is.  Example $50.
  2.  Determine how often an average customer frequents your business during one year. Example 7 visits per year
  3.  Multiply your average ticket by the yearly number of visits. $50 x 7 = $350
  4.  Determine how many years on average that you retain a customer. Example 6 years
  5.  Multiply answer #3 by answer # 4 for the average lifetime value of a new customer. $350 x 6 years = $2,100
  6.  Take your planned advertising budget for the year. Example budget of $26,500
  7.  Divide step #6 by step # 5, to find out how many new customers your need per year to cover your advertising budget. $26,500 divided by $2,100 = 12.62.

Based on this calculation, you've determined that you need only 13 new customers per year to cover your advertising budget, or roughly 1 new customer per month. This seems very achievable and maybe this business owner should consider investing more in his/her advertising budget.

Keep in mind that the above example is very conservative and does not account for referrals received during the customer lifecycle, which would significantly reduce the number of new customers needed to generate the advertising budget.

Remember, plan ahead for your Joplin advertising budget. Do not view this budget as a petty cash fund you can dip into for projects that pop up throughout the year. Advertising is an investment in your company's future. Once you have a budget planned, break it down to see whether or not it's a realistic amount.

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Topics: Small Business Resources, Marketing Strategy

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