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On average they say that a proper advertising budget should be a minimum of 2% of the budget and upwards of 10%.  Some go as high as 30% of the gross sales of products, and especially in the start up of a new business.

I think that a safe and reasonable budget will be around 8 – 10%, however this may not include the whole re-branding costs, which is another budget altogether.

While there is no definitive answer as to how much any business should spend on marketing, there are general guidelines any company can use to develop a formula that works for them.

Your first step should be to try to find out what the advertising-to-sales ratio typically is in your field. Public companies in your industry may give a figure for their marketing spending in their financial statements (found in their annual reports). With a simple calculation, you can figure out what percentage of their overall revenue that represents.

If you can’t find any public companies that seem similar enough to yours, you might want to start at 5% and then adjust your projected spending up or down based on the size of your market, the cost of media, what you can learn about how much your competitors are spending, and the speed at which you’d like to grow.

A common question from entrepreneurs and marketing professionals is where to set the marketing budget. I wish I could give you a simple answer, but the truth is there is no one-size-fits-all amount. Since businesses and industries differ widely, it’s important to look at the maturity of the business, the level of competition, revenue goals, desired positioning and other factors, like how new you are to market.

Sometimes even within the same industry marketing spending can vary due to different goals and objectives. For example, Wal-Mart spends 0.3% of its revenues on marketing while Target spends 2.5%. The reason is Target’s business strategy is to position itself as upscale and exclusive (which requires reinforcement) while Wal-Mart’s positioning is based strictly on low prices.

Many entrepreneurs calculate all their costs and profit, and then use what is left over for marketing, which is NOT a good strategy. A better approach is to consider the factors I’ve described above to see where you might fall in the generally established range of 2% to 10% of sales.

If you’re looking to launch a new product or grow aggressively you’d be in the higher end of the range. If your product is well established and faces little competition, you’d be in the lower end. Often people focus on saving money when it comes to marketing, but there are serious risks of spending too little. Remember, if done properly, your investment in marketing will pay for itself by taking your business to new heights. After all, that’s exactly what good marketing is designed to do.

How to Set an Advertising Budget

How much should you spend on advertising your business? The price to promote your company can escalate quickly – print ads, banners, radio spots, direct mail, online marketing, telemarketing, social media, public relations. It all adds up. Here are the top four methods for setting an advertising budget used by the most successful independent businesses:

1. Fixed percentage of sales.

In markets with a stable, predictable sales pattern, some companies set their advertising spend consistently at a fixed percentage of sales.

Start with last year’s total gross sales or average sales for the past few years, then allocate a specific percentage of that figure for advertising. Most businesses set aside between 2% and 5% of annual revenues for advertising. So if your annual sales are $6,000,000 then spend $120,000 to $300,000 on advertising.

As a percentage of sales, advertising expenditure varies enormously from business to business, from market to market. For example, the leading pharmaceutical companies spend around 20% of sales on advertising, whilst business such as Ford and Toyota spend less than 1%. An average for fast-moving consumer goods markets (“FMCG”) is around 8-10% of sales.

* Pros: It’s easy to understand and safe: Rather than predict the future, you’re dealing with a known amount. If you’re in a stable, predictable industry, this method is sound. This strategy keeps your budget in relation to sales volume — the very thing advertising is attempting to affect.

* Cons: The budget is based on past performance. You may lose the opportunity to capitalize on shifts in the business climate or customer trends. This method also assumes that sales are directly related to advertising, which isn’t always the case. Numerous other factors affect sales.

2. Comparable to the competition.

Adopt the industry average for ad budgets for your company. Many trade associations and industry publications can provide the average amount or percentage companies spend on advertising.

* Pros: This is an easy approach for companies with predictable sales patterns.

* Cons: It assumes that the industry average applies to all businesses in the marketplace. Companies may ignore local market forces — and miss opportunities to increase market share — if they stick rigidly to this figure rather than boost spending.

3. Objective and task-based.

Begin by setting specific marketing objectives and deciding on the tasks required to meet those objectives. (Example: Increase out-of-state clients by 5% using online promotions.) Then determine your budget by estimating the costs of carrying out those tasks. If you can’t afford to fund all your ideas, rank them and focus on the top few.

* Pros: It’s an accurate method: It ties the use of funds directly to the tasks you want to accomplish. If properly executed, the advertising becomes an investment, not an expense. By spending whatever is needed, the company may grow at a faster rate.

* Cons: If the advertising campaign flops, it can be pricey. You may not recoup costs on a bad promotion.

4. The maximum amount.

Lots of fast-growing businesses put their faith in this strategy, which advocates setting aside just enough money to sustain the business — and your family — then spending the rest on advertising.

* Pros: Like most aggressive methods, it offers the reward of rapid growth.

* Cons: It’s risky. Unless you have a solid reserve to operate your business, you may run it into the ground if your advertising fails.

Marin Media Group, with over 30 years experience, has been instrumental in helping many businesses establish and successfully implement advertising budgets from $50,000 to over $10,000,000 per year.

For a copy of my free booklet, What Should I Spend, send me an email; ross@marinmediagroup.com and I’ll get a copy over to you.