The cost of advertising your business can consume a significant percentage of your budget. However, instead of looking at it as an expense, common marketing thought suggests you view advertising as an investment, one whose return is future sales. Managing advertising costs takes planning, and analyzing the results will help you adjust your marketing strategies in the future.
Determining the Budget
The U.S. Small Business Administration (SBA) suggests two different approaches to determine the cost of advertising your business. Advertising money comes from sales revenue, so you should first estimate your total annual sales.
In the first method, you assign to advertising a specific dollar amount per sale of an item at a particular price. (The SBA's example: "$10 of the $300 selling price for each refrigerator will go to advertising, so that $3,000 in advertising should sell 300 units and produce $90,000 in sales.")
The second option involves taking a percentage of each sales dollar to put toward all your advertising efforts. (The SBA's example: "Three percent of an estimated $100,000 annual sales volume will result in an advertising budget of $3,000.")
Media Cost
Determining the reach of your advertising can be hard. To make it easier, each type of media has a number known as "cost per thousand," or CPM. It's the price of reaching 1,000 customers in that particular medium. Industry averages of CPM are available, but most individual media businesses also calculate their specific CPM.
For example, according to research by Morgan Stanley Dean Witter, the industry average CPM rates in 2001 were:
Daily newspapers: $19
Prime-time broadcast TV: $16
Radio: $6
Magazines:$6
Daytime broadcast TV: $5
Internet effective CPM: $4
Such numbers are always changing, but the point is that some media have a significantly higher CPM than others. A higher CPM could mean a lower return on investment. But you need to consider not only the cost of advertising, but also the demographics of the particular medium. It may make more sense to buy advertising with a higher CPM if the medium's audience better matches your target customers. You'll spend more to reach each individual person, but those people are more likely to become customers.
Media Planning
Analyze the demographics of your target customers -- such as media use, income and interests -- before choosing your advertising media. Once you have chosen your medium, negotiate prices with the media outlet's sales associate. Keep in mind that increased insertion rates, as opposed to a lower upfront price, can help reduce overall costs and increase audience penetration. Media planning companies can also help you negotiate better advertising rates and consolidate your advertising efforts.
Results
Your results will depend entirely on your campaign's ability to bring in sales. Successful advertising is that which yields a higher return on investment. Ad campaigns must be carefully targeted and take into consideration customer needs and buying habits.
Considerations
Before cutting your advertising budget, consider the impact on your bottom line. If you aren't meeting your sales goals with your current advertising, consider changing the media you use or the message you promote, rather than decreasing the amount allocated to advertising.
You can reduce your advertising costs in other ways. Look into co-op advertising, where the manufacturer of a product helps pay for the cost of promotion. You can also split advertising costs with neighboring businesses, sponsor an event or agree to a dollar-for-dollar trade with the media outlet.
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