First, let’s be very clear, each industry has different standards and norms for deciding what amount the advertising budget should be.
Therefore the 3 methods we are outlining cannot account for serious differences between some types of companies. For example, if you are a lawncare company, maybe your revenues drop by 40% during the winter when grass is not growing and the final leaf drop is done. This means that lawncare companies might need to scale their advertising around seasonality issues.
Or maybe your industry is fiercely competitive and you are trying to grow a new company against 3 entrenched competitors that are willing to spend a lot to stay at the top.
Since one-size does not fit all, we are going to provide 3 ways a local business owner can look at creating and maintaining an advertising budget. But wait, isn’t advertising the same as marketing? We are so glad you asked, because it is not. Usually. By definition, advertising is designed to promote the sale of a product or service. Check out more here http://www.businessdictionary.com/definition/advertising.html
Marketing is something entirely different, by definition.
In other words, marketing has less to do with getting customers to pay for your product and more to do with developing a demand for that product and fulfilling the customer’s needs. You can read more: http://www.businessdictionary.com/definition/marketing.html
So to be perfectly clear, when a business has limited funds, it is almost always advisable to invest money in advertising before investing money in marketing. Why? Because advertising is designed to help the company sell more products or services. Therefore, there is an opportunity to gauge the return on investment (ROI). We are aware that inbound marketing can be extremely effective, but that strategy will be discussed in a future article.
1) Gross Revenue Method to create Advertising Budget
For companies that have been in business for one to five years, it is often suggested that 12 to 20 percent of your gross revenue (or projected revenue) be spent on advertising.
For those companies that have been in business more than five years and have some market share/brand equity, we suggest allocating between 6 and 12 percent of your gross revenue or projected revenue.
You an learn more about this method at https://www.entrepreneur.com/article/243790
2) Life Time Customer Value Method for Advertising Budget
If you’ve been in business for several years and use a CRM or accounting software package that will enable your company to calculate an average Life Time Value for you customer, then that figure will be even more helpful in determining how much you are willing to spend to acquire a new client, If you’re not sure exactly where to start to calculate your average Life Time Customer value, you can read more about it on Digital Marketer’s website https://www.digitalmarketer.com/blog/customer-acquisition-cost/
The way the lifetime customer value method works is to look at how much net profit your company receives from each customer. Once you see how much profit each client generates- it is much easier to decide how much of that profit you are willing to invest in acquiring that customer.
Let’s take the simple example of a local attorney that knows the average life time value of a legal client that has had an accident is about $5,000 in gross revenue. But this attorney also has a paralegal to pay, office expenses, an current advertising expenditures to figure in. So once the attorney subtracts out all expenses and overhead, the lawyer figures the firm nets about $2200 in average profit. The next step is to determine what percentage of that net is the firm willing to sacrifice to attract the new client to them? Is it 10% ($220) or 15% ($330), or more?
Once that figure is determined the firm will have to go back to their data and look at how many new clients they added last year in this category and determine what percentage growth they experienced.
Let’s say this law firm saw 10% growth last year. It might seem perfectly reasonable to shoot for another 10% growth next year. But how many new clients is that? And what is the new client total multiplied by the acquisition investment to get the new clients? If 10% growth equals 10 new clients signed each month and the firm is willing to invest 15% of their value to attract them that means they are willing to invest $3,300 each month in advertising to get those new clients added.
One key metric that’s important in this method is the leads to clients ratio. Meaning, how many leads/inquiries need to be responded to in order to yield a new client? It’s worth looking at this metric for several reasons.
3) Sleep at Night Method for Advertising Budget
For those businesses just starting out, or for those owners that do not have easy access to the metrics outlined in the other two methods, figuring out what dollar amount you are willing to invest in growing your customers is usually the only option available.
It may not seem very scientific, but after working with 100s of local business owners in Louisiana, Alabama, and Tennessee, we have learned that this is the ultimate criteria.
The truth is advertising is an investment & done properly it will yield leads and new clients. So ask yourself, how much can you spend on advertising and sleep comfortably at night. If you are going to worry about the amount you are spending, it may be too much of a stretch. So ask yourself, could you spend $500 a month and rest easy? Or can you spend more, like $1000 or $1500 per month and sleep easily? This simple gut check is both practical and relevant. It can take 3-6 months to really see the full benefits of advertising, so if you are going to be biting your finger nails every month when you write that check to pay for your ads, the amount is too great. And if you don’t have at least $500 per month to spend, you may want to reconsider your business plan. In order to truly gauge results, most new campaigns require a 3-6 month testing window to determine effectiveness. So pick an amount you can spend for 6 months in a row, and sleep at night while growing your sales volume.