When it comes time to set a budget for your advertising, I have a simple rule of thumb: whatever it takes.
Okay, maybe I’m being a little weird, but after three decades in advertising, that’s about the best I can do. I could give you the standard answer most marketing textbooks offer. An average company must allocate between two and five percent of its gross income. A start-up or new business may have to do twice as much for the first year or two. Let me tweak those numbers and show you some companies that don’t meet these numbers.
During AT&T’s heyday, they only spent about one percent of their revenue on advertising. But in the 1960s and 1970s, they were making a billion and a half dollars a year. So his advertising budget was $150,000,000 a year. That’s still a staggering amount. I read somewhere that many major companies spend around twenty percent of their anticipated gross receipts during a campaign to bring a new product to market. Here are some other industries and their allocated percentages expressed in very general terms according to statistics from some current advertising magazines:
Automakers: Up to 1%, Retail Stores: 2% to 3%, Service Businesses: 3% to 5%, New Business Startups: 5% to 7%, Fast-Moving Consumer Products: 5% to 7% 8% to 10%, pharmaceutical or cosmetic products Companies: 20% and up.
But suppose you are not Revlon Cosmetics and instead your business is carpet cleaning: then where do you fit in? It depends. Once again, it’s all about the mystical and magical return on investment. If you’re new to town, chances are you need to do as much publicity as possible to establish your name and identity among other carpet cleaners. Unfortunately, it means spending considerable marketing dollars to compete with existing ads. They, after all, have already earned their place by their longevity. You need to break into the headline with a big ad to attract customers who would normally migrate to older competitors.
And it probably couldn’t have come at a worse time for you. You’ve just invested in trucks, equipment, maybe an office and overhead, employees, insurance, signage, bookkeeping, and license fees. It is an output stream with no input stream. However, now you are expected to shell out even more money for a marketing campaign. It is right at this time that many new businesses say they are burned out and choose to skip the yellow pages. It’s too expensive, they complain. But, a smart entrepreneur would have factored this cost into the original business plan. You have a business plan, right? You do not? What a shame!
Assuming you have some basic strategy for your business, then you should have an advertising assignment. It is as important as a sign on the front of the building or on the truck. I would include those articles plus any direct mail, yellow pages, and any other appropriate media. If you have a retail business, try two to five percent of anticipated gross sales. If you’re a service provider, go for four or ten percent. Then double that for the first year.
This is a general rule. There are so many factors that affect the outcome of a campaign that I’m hesitant to come up with a firm number. What if you use a figure I quote for a year and have a miserable result? Did you spend more or less? How do you know? I bet most business failures are due to lack of an advertising program or lack of funding. I remember how many of my clients scaled back their campaigns during times of recession. This is the exact opposite of how large corporations see a drop in sales. They realize that they must increase their marketing in difficult times. It may be counterintuitive for a small business to spend more when profits are down, but it’s the same as playing the stock market.
When a stock is rising, do you buy when it peaks or when it starts to fall? Most amateur investors will jump on the bandwagon of a rising stock, thereby losing almost any chance of profit. The smart investor will buy so-called “bottom feeders” because they are the best potential earners and have the lowest cost factors. Once again, the counterintuitive approach works every time. Instead of viewing advertising as an expense, think of it as an investment. Many companies think of marketing as an overhead expense. That may be true for your insurance, rent, utilities, employees, accountant, and legal fees, but advertising is the only service that can really attract customers. None of the other items mentioned above can make a sale. With the exception of a commissioned salesperson, the rest of these overheads are always just exit expenses. Therefore, you need to reevaluate your advertising strategy by viewing it in the right light: an investment that helps generate cash flow.
After many years of YP consulting, one thing stood out above all others. The idea that a company ad was a necessary evil that drained the company’s profits and was pretty overhyped. I never heard a client comment on how cheap his YP ad seemed to be and how happy he was to write that monthly directory check. Even when times were good and they knew the ad was calling, the expense was painful. What would be even more painful would be closing a business due to lack of sales.
I used to compare a YP ad to a commercial billboard. Most of the retail stores recognized the need to let the public know that ABC Auto Sales was open and spent large amounts on massive signs around the property. But, when it came to their YP show, they invariably asked how much the smallest ad would cost. I would say maybe they could consider shrinking their signage down to a tiny size, one by one foot. Of course, that would make them outraged. The whole idea was ridiculous to them and why should they even consider such a stupid suggestion? The poor homeowners didn’t make the obvious connection.
So they’d budget for a neon-lit monstrosity that would put a Las Vegas casino to shame, and yet leave a pittance for the board. When I explained to them that few people drove around town looking for the Auto Sales sign, they justified the investment by saying how many customers came in because they said they saw the sign. I was happy for them, but pointed out that putting up a sign in front of each person looking for a business would be an even better investment. Where could they do that? they wondered. Hmm. How about under the heading “Car-Dealers” in the Yellow Pages? Sure, they’d have to give up flashing lights, but think of all the electricity they could save.
My long-winded treatise is to convey a hypothesis: have a plan. Cover all essential areas of the business. Even if you decide that the directory is not your ideal form of promotion, make sure your advertising program is well-funded and part of your overall business plan. Also, have a multi-year strategy that allows for future growth and marketing, unless you’ve thought you’ll be out of business within the first year or so. In that case, save your money and enjoy a nice vacation. After all, a company that “fails to plan, plans to fail”, or so it has been said.