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Calculating Your Advertising Budget

Elaine Grant

Some great online tools can help you plan your advertising investment

When you’re running a small business, some expenses are straightforward: you know what it costs for electricity, rent, and insurance. But ad budgets are notoriously hard to calculate, no matter whether you view advertising as an expense (if so, you’re in the “necessary evil” camp) or an investment (the “critical profit-producing activity” camp). Luckily, the Web offers a variety of resources and budget calculators that will help you figure it out.

Taking the time and effort to calculate your ad budget will help you:
1. Ensure that you’re not wasting money by either overspending or under-spending
2. Better manage your total budget
3. Determine whether you need additional capital to build your brand (and how much you’ll need)
4. Learn how to measure return on your advertising investments
5. View advertising not as an expense, but as an investment that ensures your company’s success

Here are several different ways to calculate your ad budget, plus tools that help:

The easiest, most traditional calculation

Many small businesses simply use a percentage of revenue as their guide for how much to spend on advertising. If you're going to use this method, you need to figure out two things: what percentage, and what revenue? Rather than generalizing (5% of your revenue) it's better to use your industry's average percentage as a guide. For the most accurate number, base the percentage on an average of the last few years' revenues, or on the average of last year's revenues and your projection of next year's revenues.

The unit-of-sales method

This method relies on your experience, plus averages for your industry, of how much it costs to sell a certain specific product. Determine the number of such products you want to sell, multiply that number (1000 widgets X five cents per widget) and you'll get your total budget ($50). The unit of sales method works well for companies with only a few different products to sell, and for product lines with limited or circumscribed availability (an artist can make X number of carvings per year with one apprentice, for example).
Consumer Action Website.

Tie advertising investments to rent expenses

Roy Williams, an advertising author and columnist for Entrepreneur magazine, suggests an unusual way to calculate ad budgets, which should work well for retailers and others whose facilities play a role (any role, limited or significant) in their brand identity. The calculation, which is slightly too complex to repeat here, will provide you with a very specific budget range.

Calculate your budget by task and objective

Although this method is the hardest one to use, most experts agree that it's the most accurate way to come up with the right ad budget. It's hard because you must first create a marketing plan. What are your objectives? Rank them in order of importance, because you may find that you can't afford to achieve all of them. Determine: 1) who you want to reach, 2) how frequently you want to reach them, 3) where (through which combination of media) you'll get the best exposure, and 4) how much it will cost. Add it all up. Too much money? Reduce your objectives.

Online tools make it easier

There are a variety of calculators online, geared to different industries. Just plug in your numbers and go!

Search engine marketing or pay-per-click

We'd be remiss not to mention pay-per-click in a guide on calculating your ad budget. Nothing has made the analysts who work in the advertising industry happier than the rise of pay-per-click ads and other search engine marketing techniques, because it's easy to measure their return on investment - the Holy Grail of advertising.

  • Naturally, not all ads are alike. Funny headline, good production quality? Spend the same as your boring or cheesy competitor and you'll come out ahead.
  • If your business is virtually all online or you're using the Web to drive traffic, consider hiring a search marketing company; they're experts at maximizing your budget based upon measurable ROI.
  • Test your ads; measure the ROI; tweak them, and measure again. It's the only way you'll really know what works.
  • Trying to build market share? You'll have to spend more than the industry average percentage of sales on advertising.
  • Keep an eye on what your competitors are doing. Maintain a reserve ad fund for those times when you must respond to unusual or highly competitive conditions.
Image Credit: NanoStockk / Getty Images
Elaine Grant