Ah-h-h-h … the age old question. How much should I budget for my advertising expenditures? In general, companies budget too little on advertising and have high expectations of return on their investment… with little investment. The equation can’t work out no matter how hard you try. What you should invest and how much you have in your pocket are usually at odds with each other. So, here are a few guidelines to help you plan your 2010 budget.
- Percentage of sales or profits — This is an easy way to determine your advertising budget. You decide if you should spend 5%, 10% or whatever you choose and multiply that number by your gross sales or your net profits. But, this has some flaws, because if your sales are down and you use a percentage, then you also will be lowering your advertising costs, which is exactly what has happened in 2009. Companies have cut way back. But this is the time to at least maintain your budget and perhaps even increase it. If you decrease your advertising budget, you could very well decrease your sales. But, how do I figure out what that magic percentage number should be, you ask? Well, look at your competition or get other industry data to find out what other companies are spending. But, I contend, don’t be a “me too”. You can certainly be a contrarian and outspend your competition. Some companies have done this are actually making a good profit this year. Other companies who cut their advertising budgets severely are paying dearly for it. Placing a percentage of sales also causes difficulties because are you need to define sales as past sales, present sales or future sales. Are you looking backward are you anticipating the future to calculate your sales.
- Unit-of-Sale Method — You can also use a unit-of-sale method whereby you budget a fixed amount for each product unit to be sold. For example, if it takes $1.00 to sell a case of widgets and you need to sell 100,000 widgets you will need to spend $100,000 on advertising. This, actually, is probably a bit more accurate than just a percentage of sales method.
- Objective and Task Method — No one can afford to spend too much and not get a return on their investment. So, you must tie the costs to objectives and those objectives need to be tied to results. The best and probably least used method is the Objective and Task method whereby you decide on objectives and goals per your marketing plan and then you decide how much it will cost to achieve those goals. For example, you should’t be vague and just say Company X wants to increase sales in 2010. Make it more specific by saying the objective is “to sell 25% more of product X by targeting a specific market. If this is a new market that your company has no equity or market share, then you may need to spend more to get your brand recognized in this new market. If the suggested costs outweigh the dollars you have in hand, then you will need to rank your objectives and decide which ones are the most important to meet.
- Flexible Budgeting — In any event, you will need to stay flexible during the year. If you are blindsided by your competition coming out with a new widget that directly competes with yours, you may find that during the second half of the year you may need to reallocate some of those advertising funds to counter advertise. So, always keep some flexibility in the budget to shift funds from one campaign to another.
- Customer Lifetime Value Formula — This takes some thinking because you have to make some suppositions about your customers. But, you can look at past data and get a fairly accurate accounting. First of all, how much do you think each of your customers is worth? This is traditionally called the Customer Lifetime Value or CLV, for short. The formula for this is to start with your sales turnover number (this is usually described as the total dollar amount sold within a specified period of time, usually calculated as a year) and divide it by the number of customers you have. Then multiply this figure by the number of years you think the average customer is loyal to your company.
- What is your spending tolerance to get a new customer? You can estimate this as a percentage of the CLV. Then decide how many new customers you want to obtain for this budget cycle. Be realistic here. You may want a high number of new customers, but look at the market and be realistic in your expectations here. So, if each customer has a CLV of $10,000 and you can only spend 5% on each customer, then your budget for each customer would be $500. And, if you want to obtain 5 customers, you would need to spend at least $2,500.
I know these calculations are pretty simplistic, but they can help guide you in making a decision on how much to spend on your 2010 budget.
