How Much Money Does an Average Company Spend in Advertising?
The amount of money a company spends in advertising is different by industry, company size and a company's life cycle. The many variables that affect advertising decisions make it difficult to discuss advertising in terms of the average company. There are, however, available useful references that can guide your advertising spending decisions.
If you need an exact advertising figure for your industry or companies in your industry, major advertising agencies and corporations use the Schonfeld survey. Schonfeld & Associates, Inc., publishes an annual report of industry and company advertising expenditures as a percent of sales — A/S ratios — for over 4,500 companies in over 300 industries. If you're a retailer of dolls and stuffed toys, for example, the average 2012 A/S ratio for your industry was 10.4 percent. On the other hand, your A/S ratio is 2.6 percent if you own an eating establishment. The complete Schonfeld report, unfortunately, is quite pricey. It is often found, however, in major libraries and universities. Inquire with the main branch of your local library to see if they carry the Schonfeld Survey of Advertising Ratios and Budgets.
The alternative to using exact historical advertising expenditures for spending guidance is to use a rule-of-thumb-equation. The U.S. Small Business Administration counsels businesses that generate less than $5 million in revenue to spend between 7 and 8 percent of revenues for marketing. These figures are predicated on gross margins in the 10 to 12 percent range. "Marketing," however, includes development and production expenditures. The National Federation of Independent Business informs that "most" businesses allocate between 2 and 5 percent of sales specifically for advertising. Therefore, you might consider taking SBA's 7 percent marketing figure and allocate 5 percentage points for advertising and 2 for production. Assume you have gross sales of $1 million. Your total marketing budget would be $70,000. Your advertising budget would be $50,000.
In addition to the equation approach to setting ad budgets, the National Federation of Independent Business informs that small businesses commonly use the industry or competitive comparison approach, the objective and task-based approach and the maximum amount approach. Many industry trade organizations publish advertising spending specifically for their industries. These figures may be readily available for your industry. The objective and task-based approach assumes that you have clearly defined marketing objectives, which drive your marketing and advertising spending. The spend-to the-maximum approach is the ultimate fast-growth strategy. Its advocates spend what's required to maintain the business and family. Then, they spend the remainder on advertising.
Marketing and advertising are your primary drivers to get more customers while retaining the ones you have given the dynamics of your market, your competitive environment and the life-cycle stage of your company. Your marketing and advertising expenditures for your start-up company in a sunrise industry with few competitors will probably not be the same as for your long-established business in a sunset industry with competition galore. Consequently, the objective and task-based approach to spending probably works better for most businesses. It eliminates the arbitrary randomness of your spending. This approach requires a marketing plan to guide your spending. Use industry and competitive figures to set the broad parameters for the judiciousness of your spending.