First, you have to define what the ad budget covers. It should cover your media, production costs, fees, etc., to produce and place your ads. That might be print, like magazines and newspaper, or it could be broadcast, including radio, television and the Internet. Unfortunately, most people dilute their ad budget by dumping many other things into the pot, like pens with your company name printed on it, yard signs, printing of business cards and forms, well – the list goes on and on. I’ve seen some people pay their phone costs out of the ad budget, thinking that telephones are a way of communicating with customers. Sorry, but that one doesn’t count!
Once you’ve figured out what items will come out of the ad budget, you have to determine what amount of money will go into the ad budget. Here’s where it gets tricky; some experts say that you should assign a percentage of sales to determine the annual ad budget. Most agree that it should be anywhere from 3% to 8% of sales. But if it’s a new company, you have to put in a higher percentage in order to generate awareness and sales for the new company.
Other long-time advertisers say that the percentage actually varies by industry; for example, if you’re in retail then that percentage range (3% - 8%) might be fine, but if you’re in a different industry, say pharmaceutical manufacturing, for example, the percentage might be as low as 1.5%. You can do some research by government SIC codes to see what percentage any particular industry recommends.
Of course, whatever your research uncovers should just be considered a guideline. You’ll need to determine what budget comfort level is right for you. And you’ll need to take a look at your sales trends – if you’re trending down, you might want to consider upping the ad budget to increase your market share. On the other hand, it might not have anything to do with your ad budget. It could be the creative, or any one of a hundred different factors. That’s why there are no hard-set rules about ad budgets. Ultimately, you’ll need to decide what’s best for your company.