One of the big questions small and medium size business owners wrestle with is,
“What Is The Right Marketing Budget?”
Granted, if you’re just starting out and haven’t made anything yet, it is very difficult to “project” your marketing budget based on annual sales revenue.
But, if you’ve had a couple years under your belt, use this to determine
your marketing budget.
Example of Marketing Budget Plan…
Calculate your “minimum and maximum” allowable ad budgets and the answer will be in there.
Sample Marketing Budget:
Step 1: Take 10 percent and 12 percent of your projected annual, gross sales and multiply each by the markup made on your average transaction. (MARKUP is Gross Profit Dollars ÷ Cost of Goods) Remember that we’re talking about gross markup here, not margin. Markup is gross profit above cost, shown as a percentage of the cost.
MARGIN is Gross Profit Dollars ÷ Gross Sales Volume If you sell an item for $150 when it only costs you $100, then your markup is 50 percent. Your margin, however, is only 33.3 percent. This is because the same $50 gross profit represents 50 percent of your cost (markup,) but only 33.3 percent of the selling price (margin.)
Marketing Budgets by Industry and the Average Marketing Budget:
Most retail stores in America (tile, bike shop, jewelry etc.) operate on an average markup of around 100 percent. Some operate on as low as 50 percent markup and others add as much as 200%.
More expensive items, like cars, homes, and boats typically carry a markup of only 10 to 15 percent. But, many other retail stores can’t use this to calculate their marketing budget.
Step 2: Deduct your annual cost of Lease or Rent from the adjusted 10 percent of sales number and the adjusted 12 percent number you have.
Step 3: The remaining balance represents your minimum and maximum allowable ad budgets for the year. You may discover that you’ve already spent your ad budget on expensive rent, or you might also realize that you should have been doing a lot more advertising than you thought you should.
Now let’s calculate the ad budget. If you were projecting to do $1 million in sales this year, and I have a profit margin of 48 percent, and my rent is $36,000 per year. First, calculate 10 percent of sales and 12 percent of sales ($100,000 and $120,000, respectively).
Second, convert your 48 percent profit margin into “markup,” because markup is what we need to have to make this formula work.
Most business owners know their “margin,” but not their “markup.” To make the conversion from “margin to markup,” just divide your gross profits by cost.
Example: Divide $480,000 (gross profit) by $520,000 (hard cost), and shows you that a 48 percent margin represents a markup of 92.3 percent. That’s it!
Now we multiply $100,000 times 92.3 percent to see that our adjusted low budget for the total cost of exposure is $92,300.
Doing the same with the higher, we multiply $120,000 times 92.3 percent to get an adjusted high budget for a total cost of exposure of $110,760.
From each of these two budgets, now, we have to deduct our $36,000 rent. This leaves us with a accurately calculated ad budget that ranges from $56,300 to a maximum of $74,760 on the high side.
Too many ad salespeople will tell you that 5 to 7 percent of gross sales is the correct amount for your marketing budget, but that’s ridiculous.
It’s not possible to designate a percentage of gross sales for your marketing budget without taking into consideration the “markup on your average sale and your rent.”
It’s true that a high-visibility location is usually the best advertising your money can buy, since a business with a great location won’t need to advertise as much as a similar business in a more “affordable” location.
Creating a Marketing Budget:
Look at the example above to understand what I mean. Change the rent to $75,000 per year. Now, the ad budget would range from $17,300 to $35,760, representing only a 1.7 to 3.5 percent of sales.
This is the only real formula to use when you want to know how much you should spend on your ad budget, with your “rent as well as the profitability of your average sale.”