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Developing an Advertising Budget

written by: Ivy N. McQuain MBA•edited by: Michele McDonough•updated: 10/16/2009

Just exactly how much should a small business spend on advertising? This article acquaints you with some of the ways of developing a good advertising budget.

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    Need for Spending on Advertisements

    Many small business owners initially depend on word-of-mouth and other forms of free advertising to generate sales. After the initial impetus, this does not increase sales dramatically. The business owner now has to think of spending on advertising. For this one needs to know how to calculate an ad budget for a small business. There are many ways of doing this. The most common are discussed here. It is advisable for a small business to calculate an ad budget stringently and stick to it so that there is no downturn in profits.

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    How Much Should a Business Spend on Advertising?

    The most common way of calculating ad budgeting is to make it a percentage of gross sales. Almost all businesses allocate 2 to 5 per cent of their previous year’s gross sales for advertising. If you are new to the business and do not have the previous year’s figures, use industry averages. You can find this from the Net or your business bureau.Advertisement Budget 

    Here it is important to remember that if your business is located in a good area, your ad budget can be less. If, however, your business is located in one of the back streets, then your ad budget needs to be higher. In other words, if you spend a lot on rent, for the right location, then spend less on ads. A shop or outlet in the right location itself is worth a lot of ad money.

    Another way to calculate your advertisement budget is to focus on your sales objectives. Here you plan your target sales first and work backwards to calculate how much you need to spend on advertising to achieve it. If all works well, this is a great method. However, incorrect advertising can eat in to the profits of a business. If you are choosing this method, please ensure that the ads are correctly targeted.

    As you will be running a series of ads, you next need to determine how much you will spend on a particular ad. This will vary depending on which of the two methods described above that you choose to define your ad budget. Apart from this, you will have to factor in things such as the short term and long term benefits to your company from the ads. You will also have to check if your competition is also advertising and how much it is spending on ads. You will also have to fix a specific time period for achieving the goal of the ad.

    In addition, you need to know where most of your current customers come from. Then you will have to decide if your growth in customer base should be from the same area or a new area. This will help you determine where (that is, which locality) you should target your ads at.

    Next, you need to check if the ad has worked. You need to find out if all the goals you set for the ad have been met. Have you generated new customers? If not, why? Did the ad really work or did your business piggy back on the extra people who visited the area due to other events there? This is something that you have to track. Another thing that might have affected your sales is the weather. Was the weather conducive to sales of your products? You need to answer all these questions to figure out if your ad truly worked.

    If the ad worked, you can repeat it or go forward with the campaign. If, however, the ad did not work, you need to rethink and perhaps come up with a new concept for an ad. Such constant monitoring will help you to meet your sales targets when staying within your ad budget.

    Image Credit: Wikimedia Commons