Developing a Realistic Ad Budget

Helping Retailers Develop a Realistic Advertising Budget

By Dave Baragrey

 

How do retailers develop an advertising budget? Research shows that less than half of independently owned businesses do any sort of planned budgeting for advertising. Many of these businesses only budget for the upcoming month. Good business practice dictates planning is essential to yield good return from the retailer’s advertising budget.

 

Many advertisers base their advertising strategy on end of the year whims or, worse yet, on last year’s advertising expense. With increased competition for local businesses from national chains, mail order, cable TV and e-business aggressive businesses that expect continued sales growth must exercise initiative in their future advertising and promotion planning. If they want to grow, they have to have an aggressive advertising plan.

 

Businesses have developed many different ways to establish advertising budgets. The basis for these formulas include:

· Industry Averages

· Last year’s advertising expense

· What they have always done

· A percent of store sales minus rent (higher rent equals smaller advertising budget)

· A percent of sales depending upon profit margin

· What uncle Jasper told them they should spend

The formula that many businesses have found to be useful is the floating percent of sales based upon margin of profit. This works best for businesses that sell a product and can identify the cost of goods. The premise for this formula is relatively simple. The higher the margin of profit, the higher the percent of sales they can afford to spend. The steps to use this formula follow:

1. Establish sales projections for upcoming months. These projections should carefully developed using true and realistic evaluations of the market. Begin with last year’s sales figures. Each of the following factors needs to be considered when forecasting sales for upcoming months. Adjust by the influence of:

· Market size changes - Is your community growing? Are you expanding into new markets?

· Market share changes – Has a competitor changed ownership and become more aggressive obtaining some of your customers? Are you after more market share this year? Has anew large competitor entered the market and taken customers from you.

· Price changes – Has the price of the product sold increased or decreased?

· Product line changes – Is the store handling a different blend of merchandise? Have they dropped a brand that Wal-Mart carries? Have they expanded a product line?

 

2. Determine the average Gross Margin of Profit (GMP). This is very simply the cost of merchandise divided by store sales. Subtract this percent from 100%. The balance is the gross margin of profit. Example: Store sales were $500,000. Cost of merchandise was $300,000. The Gross Margin of Profit is 40%.

 

The chart that follows sets a benchmark to help businesses establish a percent of store sales they should spend on advertising. Multiply the percent that corresponds with the store’s Gross Margin of Profit (GMP) by the projected sales for each month.

 

Gross Margin of Profit           Percent of store sales spent on advertising

20 ……………….1.4%

21 ……………….1.5%

22 ……………….1.6%

23 ……………….1.7%

24 ……………….1.8%

25 ……………….1.9%

26 ………………..2%

27 ……………….2.2%

28 ……………….2.5%

29 ……………….2.8%

30 ……………….3%

31 ……………….3.2%

32 ……………….3.5%

33 ……………….3.7%

34 ……………….3.8%

35 ……………….4%

36 ……………….4.2%

37 ……………….4.3%

38 ……………….4.5%

39 ……………….4.7%

40 ……………….4.9%

41 ……………….5%

42 ……………….5.2%

43 ……………….5.4%

44 ……………….5.6%

45 ……………….5.8%

46 ……………….6%

47 ……………….6.2%

48 ……………….6.4%

49 ……………….6.7%

50 ……………….7%

 

As an example, most grocery stores will operate at a 21% GMP. They would spend 1.5% of sales on advertising. A well run furniture store should average a 42% GMP. They would spend 4.2% of sales on advertising. A fortunate jewelry store or gift shop may run a 50% GMP. They could afford to spend 7% of sales on advertising. If a furniture store has sales forecasted of $500,000 in the month of April they should plan to spend $26,000 on advertising in April. If sales were forecasted to drop to $250,000 in May they would plan to spend $13,000 as long as they are maintaining their margin of profit.

 

Understanding the process of helping an advertiser develop a realistic advertising budget will set you apart from of media representatives. This will help position you as a partner in making his business a success instead of just another salesperson trying to get into his billfold.

 

Here is a quote to remember:

"American advertisers rely on 'essentially illogical' approaches to determine their advertising budgets."

- Michael Schudson, from the book Advertising, The Uneasy Persuasion: Its Dubious Impact on American Society, 1984

 

Dave Baragrey is a business consultant and sales trainer for Publishers-Edge, a Special Section syndicate for print and on-line special sections, and Consulting business specifically designed to help newspapers and shopping guides.

Websites – www.Publishers-Edge.com, www.Coupon-America.NET and www.SpecialSectionOnLine.com

E-mail dbaragrey@Publishers-Edge.com

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