Calculating the Ad Budget

Most business owners have been taught to budget 5 to 6 percent of total sales for advertising and another 5 to 6 percent for rent or cost of occupancy.  The formula, however, often results in under performance due to too little being spent on advertising.  The business owner who spends only 1 to 2 percent of total sales on costs of occupancy is seriously under spending when only 5 to 6 percent is budgeted for advertising.

The purpose of advertising is to increase the exposure of your business beyond what is provided by your physical location.  The business owner who saves money by investing in weak location will have to advertise much more heavily.  A cost of occupancy for a landmark location is often the least expensive advertising your money can buy.

Although there’s no “one size fits all” formula for calculating the correct advertising budget, there is a concise formula for calculating the ad budget for retail businesses, and, in my experience, the formula can be easily adjusted to serve other business categories as well.

The following formula assumes a retail business with a 50% gross margin (100% markup):

Step 1: Budget 10-12 percent of total projected sales for total cost of exposure.

Step 2: Adjust the figure by the store’s average markup (above cost of goods sold).  If the average markup is 100% (“keystone”), then the formula is adjusted (10-12 percent of projected sales*100percent).  If the average markup is only 91 percent, then the adjusted budget for total cost of exposure will also be reduced by 9 percent (10-12 percent of projected sales*91 percent…see?)  Likewise if the average markup is 150 percent, then the adjusted budget for total cost of exposure would be increased by 50 percent (10-12 percent*150 percent.)

Step 3: Deduct your cost of occupancy from your adjusted total cost of exposure.  The balance is your ad budget.

 
Source: Roy H. Williams, “Secret Formulas of the Wizard of Ads”

For help with your annual ad budget and how Television can help grow your small business, call our local sales managers at KTAB or KRBC TV at  325.695.2777