I get asked “how do I determine how much I should spend on marketing and advertising?” as much as any question, I suppose, and I admire it for two reasons:
- It shows strategic thought about marketing and advertising as a necessary, calculated expense.
- When budgeting long-term for marketing, you can save yourself a lot of money by buying in bulk or buying in advance. In this way, media channels are no more or less a commodity than forms, coffee, or paper towels.
Typically, we see most family business calculate their marketing budgets as a percentage (typically 3-10%) of sales, and that’s a great baseline to establish an annual number; however, several factors can affect this baseline number. Before getting into these factors, it should be noted that your company should plan to spend that three to ten percent based on next year’s projected sales.
Longevity – A company that has a foothold in the market has built up generational equity to make themselves a household name. For this reason alone, a 60-year-old company may spend closer to three percent than ten since their goal may be to hang on to their current market share or use their entrenched network of repeat and referral business to help them increase their market share.
Competitive Environment – There are three factors here: how good are your competitors, how well-known are they, and what are their perceived reputations in the market. I suspect you can estimate answers to each of these questions given your unique knowledge of your industry and your market.
Physical Plant Visibility – How are your locations? Do people drive past you every day? While there are not necessarily any emotional anchors associated with seeing you every day, it doesn’t hurt for unaided recall to have a highly-visible location. Sometimes, the cheapest advertising is expensive rent. Conversely, if your location limits the amount of drive-by traffic everyday, you’re going to have to factor in a higher percentage of sales to your budget.
Margin – Let’s be frank… if you make more money on your goods and services because you mark them up higher than average, you can and should spend a larger percentage of your sales on marketing and advertising. Don’t look at this as a negative. Remember, this book and your training in the good principles of the first four tiers of The First Order Of Business will help you make this larger spend a great investment.
Market – $60,000 in Nashville, Tennessee is very different than $60,000 in Hohenwald, Tennessee. You may not like the tax you pay for living in a large market, but you have more potential customers in exchange for that tax. You also have more noise with which to compete. You also have more options for takeout… which is always a good thing.
If this was easy, everyone would be doing it well.
Oh, and PS – in our world, here’s the difference between “marketing” and “advertising.”