The advertising budget of a business is typically a subset of the larger sales budget and, within that, the marketing budget. Advertising is a part of the sales and marketing effort. Money spent on advertising can also be seen as an investment in building up the business.
In order to keep the advertising budget in line with promotional and marketing goals, a business owner should start by answering several important questions:
1. Who is the target consumer? Who is interested in purchasing the product or service, and what are the specific demographics of this consumer (age, employment, sex, attitudes, etc.)? Often it is useful to compose a consumer profile to give the abstract idea of a "target consumer" a face and a personality that can then be used to shape the advertising message.
2. What media type will be most useful in reaching the target consumer? These days, a small or mid-sized business will not only consider print, radio, and television ads, but -- more importantly, perhaps -- the Internet as a way of reaching customers.
3. What is required to get the target consumer to purchase the product? Does the product lend itself to rational or emotional appeals? Which appeals are most likely to persuade the target consumer?
4. What is the relationship between advertising expenditures and the impact of advertising campaigns on product or service purchases? In other words, how much profit is likely to be earned for each dollar spent on advertising?
Answering these questions will help to define the market conditions that are anticipated and identify specific goals the company wishes to reach with an advertising campaign. Once this analysis of the market situation is complete, a business must decide how best to budget for the task and how best to allocate budgeted funds.
BUDGETING FOR ADVERTISING
To be successful, advertising should carry messages that appeal to your customers when they want to buy and reach them through the media they use. It's amazing how many ad campaigns are based on trying to resolve a business problem -- i.e. clearance sales designed to reduce inventory using such slogans as "Everything Must Go" or "Must Reduce Overstocks." The U.S. Small Business Administration advises businesses that the main ingredient for successful advertising is to pitch your products or services to resolve a customer's problem. Given this, the SBA suggests that your advertising budget should be based on the following criteria:
• Time your ad campaign for when the customer wants to buy, not based only upon when you want to sell.
• Advertise items that will be popular with customers, instead of basing this decision on what items you want to get rid of.
• Ads should be written to tout customer benefits.
• Choose your advertising medium based on the ability to reach prospective customers.
How Much to Budget on Advertising
Figuring out how much to spend on advertising should begin with your sales revenues. The cost of advertising will be paid for by sales and increasing sales is your goal of an ad campaign. Therefore, there are two formulas that the SBA recommends small businesses use when deciding how much to spend on advertising:
1. How much money do you need to promote the sale of a certain product at a given price? The SBA uses the example that if you spend $10 of the selling price of an item that cost $300 on advertising, then you should be willing to spend $3,000 in advertising to sell 300 units and generate $90,000 in sales.
2. The other way is to set aside a flat percentage of your total projected sales revenues for advertising. So if you plan to dedicate five percent of your revenues and you expect to bring in $100,000 in sales that year, you would spend $5,000 on advertising.
Once you have a handle on how much money you plan to budget for advertising, you need to figure out when you should spend that money during the next 12 months. The SBA has free sample worksheets and templates that you help you budget for advertising. While the plotting of this data may be time-consuming, it can help you compare your actual sales against the goals you set in crafting your advertising strategy. This way, you can decide whether to make changes.
Once a business decides how much money it can allocate for advertising, it must then decide where it should spend that money. Certainly the options are many, including print media (newspapers, magazines, direct mail), radio, television (ranging from 30-second ads to 30-minute infomercials), and the Internet (search engine optimization, banner, and pop-up ads). The mix of media that is eventually chosen to carry the business's message is really the heart of the advertising strategy.
The target consumer, the product or service being advertised, and cost are the three main factors that dictate what media vehicles are selected. Additional factors may include overall business objectives, desired geographic coverage, and availability (or lack thereof) of media options.
Kim T. Gordon, author, marketing coach and media spokesperson offers three general rules to follow when trying to select a media vehicle for advertising in an article entitled "Selecting the Best Media for Your Ad."
Rule number 1: eliminate waste. The key to selecting the right media source is to choose the source "that reaches the largest percentage of your particular target audience with the least amount of waste." Paying to reach a larger number of people may not serve well if the audience reached has only a small percentage of likely customers of your product. It may be preferable to advertise in a paper or magazine with a smaller distribution if the readers of that paper or magazine are more likely to be in the market for your product or service.
Rule number 2: follow your customer. Here again, the objective is to go to the sources used most by your target market, especially a source that that audience looks to for information about your type of product or service. Gordon explains that advertising "in search corridors—such as the Yellow Pages and other directories—is often a cost-efficient solutions. They're the media customers turn to when they've made a decision to buy something."
Rule number 3: buy enough frequency. We are constantly bombarded with advertisements and images and in order to penetrate the consciousness it is important to be seen with some frequency. Gordon emphasizes that it is "essential to advertise consistently over a protracted period of time to achieve enough frequency to drive your message home."
The timing of advertisements and the duration of an advertising campaign are two crucial factors in designing a successful campaign. There are three methods generally used by advertisers in scheduling advertising. Each is listed below with a brief explanation.
• Continuity—This type of scheduling spreads advertising at a steady level over the entire planning period (often month or year, rarely week), and is most often used when demand for a product is relatively even.
• Flighting—This type of scheduling is used when there are peaks and valleys in product demand. To match this uneven demand a stop-and-go advertising pace is used. Notice that, unlike "massed" scheduling, "flighting" continues to advertise over the entire planning period, but at different levels. Another kind of flighting is the pulse method, which is essentially tied to the pulse or quick spurts experienced in otherwise consistent purchasing trends.
• Massed—This type of scheduling places advertising only during specific periods, and is most often used when demand is seasonal, such as at Christmas or Halloween.
ADVERTISING NEGOTIATIONS AND DISCOUNTS
No matter what allocation method, media, and campaign strategy that advertisers choose, there are still ways small businesses can make their advertising as cost effective as possible. Writing in The Entrepreneur and Small Business Problem Solver, author William Cohen put together a list of "special negotiation possibilities and discounts" that can be helpful to small businesses in maximizing their advertising dollar:
• Mail order discounts—Many magazines will offer significant discounts to businesses that use mail order advertising.
• Per Inquiry deals—Television, radio, and magazines sometimes only charge advertisers for advertisements that actually lead to a response or sale.
• Frequency discounts—Some media may offer lower rates to businesses that commit to a certain amount of advertising with them.
• Stand-by rates—Some businesses will buy the right to wait for an opening in a vehicle's broadcasting schedule; this is an option that carries considerable uncertainty, for one never knows when a cancellation or other event will provide them with an opening, but this option often allows advertisers to save between 40 and 50 percent on usual rates.
• Help if necessary—Under this agreement, a mail order outfit will run an advertiser's ad until that advertiser breaks even.
• Remnants and regional editions—Regional advertising space in magazines is often unsold and can, therefore, be purchased at a reduced rate.
• Barter—Some businesses may be able to offer products and services in return for reduced advertising rates.
• Seasonal discounts—Many media reduce the cost of advertising with them during certain parts of the year.
• Spread discounts—Some magazines or newspapers may be willing to offer lower rates to advertisers who regularly purchase space for large (two to three page) advertisements.
• An in-house agency—If a business has the expertise, it can develop its own advertising agency and enjoy the discounts that other agencies receive.
• Cost discounts—Some media, especially smaller outfits, are willing to offer discounts to those businesses that pay for their advertising in cash.
Of course, small business owners must resist the temptation to choose an advertising medium only because it is cost effective. In addition to providing a good value, the medium must be able to deliver the advertiser's message to present and potential customers. Furthermore, during times of economic downturn, while you might consider cutting your advertising budget, some experts say that you may have more to gain by increasing your ad spend. The New York State Small Business Development Center advises that by boosting your advertising "you can create a dominant presence: the business that stands out while others are fading into the background." If media outlets are experiencing a drop in advertising, you may also be able to negotiate better rates.
New Internet Options
One medium that has grown in popularity for advertising over the past decade is the Internet. Nearly every business should establish a website so that customers can easily find them. In addition, there are cost-effective ways to advertise your business using Internet search engines, social networks, and online videos.
• Search engine optimization -- Search engine optimization (SEO) is fast becoming a must-have body of knowledge for business owners. Nearly 91 percent of all Internet users resort to a search engine to find information, according to a recent survey by the non-profit Pew Internet and American Life Project. You already could be making costly mistakes, such as a home page that is almost all images and little text, causing your site to have unnecessarily low rankings and little traffic. Or worse, you could be using hidden text and winding up with an every more onerous problem because some search engines ban sites that use tricks to improve rankings. Some businesses hire outside SEO consultants to help. Others learn the art of SEO from some of the free online tools, such as WordTracker keyword tool, Google AdWords, ClickTracks and SEO Moz page strength tool.
• Social networks -- Social media presents an opportunity for advertisers. But it's been difficult for advertisers to measure ad effectiveness when the social media audience is so fragmented -- until now. According to Forrester Research, 75 percent of Internet users use social media, but less than half actively participate and influence their communities. Monetizing social media has been a challenge, but Lotame, a New York-business intelligence network and iWidgets of San Francisco, have made inroads into this maze by targeting users when they're in the right mindset.
• Online video ads -- With the growth of interest in online video, some businesses try advertising using online video ads. But more than half the respondents in a BurstMedia survey say they stop watching an online video if they encounter an ad, and 15 percent say they immediately navigate away from the site altogether. Another way to make a big impression with video on a tiny ad budget is to try to create videos customers will forward to each other. A small -- but growing number -- of businesses have had success with advertising through viral video. The best thing is that your costs are basically limited to financing the production of the video.
RELATIONSHIP OF ADVERTISING TO OTHER PROMOTIONAL TOOLS
Advertising is only part of a larger promotional mix that also includes publicity, sales promotion, and personal selling. When developing an advertising budget, the amount spent on these other tools needs to be considered. A promotional mix, like a media mix, is necessary to reach as much of the target audience as possible.
The choice of promotional tools depends on what the business owner is attempting to communicate to the target audience. Public relations-oriented promotions, for instance, may be more effective at building credibility within a community or market than advertising, which many people see as inherently deceptive. Sales promotion allows the business owner to target both the consumer as well as the retailer, which is often necessary for the business to get its products stocked. Personal selling allows the business owner to get immediate feedback regarding the reception of the business' product. And as Hills pointed out, personal selling allows the business owner "to collect information on competitive products, prices, and service and delivery problems."
"The Advertising Budget." Small Business Administration.
Campbell, Anita. "How to Learn Search Engine Optimization." IncTechnology.com. February 2007.
Clark, Scott. "Do the Two-Step with Advertising Budget." Memphis Business Journal. March 3, 2000.
Foley, Mary O. "Targeted Search – How to Optimize It." IncTechnology.com. March 2008.
Gordon, Kim T. "Call in the Pros." Entrepreneur. December 2000.
Gordon, Kim T. "Selecting the Best Media for Your Ad." Entrepreneur. September 2003.
Osborn, Alice. "Online Advertising through Social Media."IncTechnology.com. January 2009.
Pinson, Linda and Jerry Jinnett Steps to Small Business Start-Up. October 2003.
Rasmussen, Erika. "Big Advertising, Small Budget." Sales and Marketing Management. December 1999.
"Recession Survival Guide for Small Business." New York State Small Business Development Center. 2009.
Silver, Jonathan. "Advertising Doesn't Have to Break Your Budget." Washington Business Journal. May 1, 1998.
Williams, Roy. "Small Business Advertising Ideas and Tips." Microsoft Small Business Center. 2009.
Zetlin, Minda. "Viral Video Helps Market Products." IncTechnology.com. December 2008.