Is Your Ad Spending Too High or Too Low?
by Iris Dorbian.
Is Your Ad Spending Too High or Too Low? How to figure out an appropriate ad/marketing budget based on your small business’s revenue and industry. It’s a dilemma that many small businesses will confront: To grow and attract or increase customers, you have to spend money on marketing; but if you’re still scrambling to find customers, then you likely don’t have much cash available for a marketing budget. So how do you go about it? Should you hope that the value of your business will be so apparent that word of mouth will go viral, allowing you to invest next to nothing for promotion? More realistically, what metrics should you use to determine how much of your company’s coffers should be dedicated to marketing based on your revenue and industry sector?
Ignore marketing myths
If you want to get an accurate estimate of how much you should spend on marketing, then the best first step is to disregard the standard rule of thumb that says the figure should be seven to 10 percent of your sales revenue. This bit of conventional wisdom might have been true in the past when corporations like Proctor & Gamble sowed the seeds of their dominance by sticking closely to that ratio. But that thinking will likely not apply to your small business, particularly if it’s an e-commerce site or a b2b (business-to-business) equipment manufacturer/supplier.
“Marketing is an investment that is leveraged against future revenue potential,” explains Jayme Pretzloff, online marketing director for Wixon Jewelers, a Minneapolis-based high-end luxury retailer that has 30 employees. “This is key. When marketing is done correctly, it shouldn’t cost you money, it should make you money.”
Bob Shirilla, owner of two 11-year-old e-commerce sites, Simply Bags, which sells custom tote bags, and Keepsakes, Etc, which retails throw blankets and wall tapestries, subscribes wholeheartedly to this maxim. Using inexpensive tools like Google Analytics to monitor performance metrics such as sales conversion rates and Google Adwords for advertising, Shirilla, who maintains a staff of eight to 12 employees depending on the season, likes to keep his ad spend to a minimum until data analysis indicates otherwise.
“We will start a campaign with a very low hourly maximum spend limit ($25),” he explains. “Each morning we look at our analytics and it will show our exact conversion rate and ROI per campaign. If the ROI is good, we’ll increase the ad spend in that space.” Is Your Ad Spending Too High or Too Low?
Evaluate your sector and its marketing needs
Different industry sectors have different marketing and advertising needs. If you run a small b2c (business to consumer) business that sells a image-based product like perfume, you might be required to undertake a considerable outlay for advertising and point-of-sale displays, says Katherine Cleland, a marketing consultant who works with small business clients as president of her own firm Cleland Marketing. For this kind of small business, “marketing costs may be the largest part of a company’s budget.”
“I generally advise my clients that marketing, excluding sales, should amount to two to 25 percent of their revenues, on an ongoing basis with greater investment as they ‘start up’ or during testing or expansion phases,” explains Cleland. “However, I also counsel them that is only a rule of thumb, and all marketing spending planning should be done from a bottoms up basis, looking by category at expense and measuring ROI.”
For instance, if your business is in the b2b sector—for example, a technology company providing equipment or materials to other businesses—then marketing costs can be as small as “maintaining a website and creating a product brochure, amounting to fractions of one percent of the revenue,” adds Cleland.
Track marketing ROI to see what works and what doesn’t
If you want to determine how much money in your budget should be earmarked for advertising and marketing, then you will need to see which of your marketing initiatives (i.e. print, TV, radio, digital, etc.) generate positive ROI.
“For small businesses that don’t have money to play with, it is better to minimize risk and focus first on measurable marketing activities like online advertising, SEO, and email marketing,” advises Ricky Shockley, an independent marketing consultant who works with small businesses and launched his own agency, Shockley Marketing this past October. “These things are all very easy to measure in terms of ROI.”
To illustrate his point, Shockley offers this example: “One of my clients, a cosmetic dermatology practice, was previously spending a couple of thousand dollars per month for a local marketer to handle their paid Google Ads. This is an activity that makes it very easy to measure ROI, but they weren’t doing so. After we did some investigating, we realized that the total revenue they were generating each month was about half of what they were spending. We then switched over to organic SEO as a marketing tactic. This reduced costs from $2,000 per month to $700 per month. We also added a prominent call-to-action to the company website in order for us to capture valuable lead information. The practice now sees about a 250-percent ROI every month.”
Tyler Sickmeyer, owner and CEO of the five-year-old 5Stone Marketing, an agency that has a variety of small business clients, agrees with Shockley about the importance of tracking ROI rates in calculating one’s advertising and marketing budgets. At the same time, businesses should go that extra granular mile by focusing on “the true cost and profit of a customer” when setting a needed ROI rate of a marketing campaign versus an expected ROI.
Sickmeyer recounts how a b2b small business client of his purchased $48,000 of airtime on a radio station for 2013. “[That figure] seems like a lot, but when you figure that the average client is worth $12,000 annually to the client, they only need to gain five new clients for a 20-percent profit margin on the campaign over the course of the year.”
Not all clients’ marketing needs are created equal. “Another client of ours, a restaurant, was approached to place a $150 ad in a mass coupon mailer,” recalls Sickmeyer who oversees a staff of seven. “Knowing that the restaurant’s profit margin is about 30 percent, the restaurant would have to do around $500 in new business from the mailer to break even, which breaks down to about 25 new customers per month. [This was] a figure we deemed unrealistic given the mailer’s past performance with coupon redemption in which only 10 or 12 coupons came in.” Is Your Ad Spending Too High or Too Low?
Sickmeyer’s experience dealing with these disparate small business clients leads him to offer two key takeaways for companies in a quandary when it comes to figuring out what part of their budget is appropriate for marketing and advertising. Is Your Ad Spending Too High or Too Low?