Jan 2015 20

Q: Connor I have been watching you for a while. However I wanted to know what is the best way to decide how much to spend on marketing per year? Kevin Sempers

Alright Kevin besides the creepy stalker vibe I got at first from the whole “watching me for a while thing” haha, I will answer the question. First I want to address the difference between marketing and advertising. Many people ask this and don’t really understand the difference, and seeing the fact that I will be answering this publicly I will go over that briefly. For the few people that may get confused by what I mean let me explain. There are a lot of different ways to market your business and advertising is only one of them. In fact advertising is the most expensive way to market. Here are a few examples of marketing that would not cost anything.  Having your customers review your product or service publicly on sites like yelp, asking your current happy clients if they can think of anyone else that could use the same benefits that they themselves are getting from you and then referring those people to you, and also the customer experience that your clients can come to know and love when doing business with you.

So in fact you can spend hardly anything a year and get great results. However running a business exclusively on referrals can be a bad idea as well. So how much should you spend on advertising a year?

The Percentage Method

This is one of the ways a lot of people tell you how to do it. You take a percentage of your gross sales and spend that each year. On average people will state that spending 5%-7% is a good amount to spend on advertising. If we look at the big guys we can see that’s not always the case. In fact if you are going to use the percentage method what we learn is you should spend around 5% just to keep up with last years sales. 9%-10+% would be used to explode into the market and is usually needed for growth. However as we learn from Walmart who only spends .04% of their 129 billion gross income on advertising, there are many exceptions to the rule. So really this method looks good on paper but can not always be the best way to go about it.


The Calculating Way

Maybe you’re like me and you might not be a fan of math, and even though this method takes a little more time and effort it does seem to work the best.

First Step is to take 10 and 12 percent of your gross sales and multiply each by the markup you make on your average sale. So say you make 720k a year you would get $72,000 at ten percent and $86,400 at 12%. Then take your profit margin say in this case is 45%. We then need to convert that profit into a markup. This is where it gets difficult for many people because business owners know their profits but very rarely they know the markup. So this is how you do it take $324,000 (gross profits) and divide that by $396,000 (hard cost) and that will give us a 0.8181818181818182 you take that number and move the decimal over two spots and get 81.8 percent. (Most of you probalby know how to do that but I like to help everyone.)

Step two is to then take the $72,000  times 81.8  percent (so 72,000 times 0.818) to see that the adjusted minimal budget is $58,896. Then we do the same thing for the $86,400 times 81.8 percent (so 86,400 times 0.818) and we get $70,675. Then we deduct our rent say $24,000. So this leaves us with the best possible calculated ad budget that ranges from $34,896 – $46,675 per year.

So in conclusion that really is the best way to figure it out. It will always be the best and most detailed and accurate way to calculate it. However if you just want to get it done fast (not recommended) go for the percentage way.   

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