There are 3 key elements to consider when planning your ad budget: projected annual sales, average markup (not margin!), and cost of occupancy (rent, mortgage, etc.). Your ad budget and your rent combine for what is called Total Cost of Exposure (TCE). A solid strategy is to budget 10%-12% of your projected annual sales for TCE.
-Projected Annual Sales-
If you’ve been in business less than a year, this can be tricky. Just use your best estimate. The idea is to project growth in your sales over the next 12 months, not to “play it safe” by using your sales from last year. So, if you’re currently a $500,000 per year business and you want to be a $600,000 per year business, advertise like a $600,000 business THIS year!
-Average Markup-
There is a big difference between margin and markup. It’s amazing how often business owners confuse the two. Gross sales minus cost divided by cost gives you the percentage of markup. Gross sales minus cost divided by sales gives you the gross margin percentage. When calculating the ad budget, be sure to always use markup %.
-Cost of Occupancy-
What if you have a great location that costs you a ton in rent each year? Think about it. Isn’t a major purpose of advertising to increase the awareness of your physical location? You’ll be happy to know that this formula takes your rent and/or mortgage payment into account. Ever wonder why none of those small boutique stores in the mall advertise much? Maybe it’s because their cost of occupancy accounts for their entire TCE!
Here is a simple online calculator where you can plug in your own numbers. What did you learn from this exercise? Do you have more marketing dollars than you thought? Or is your TCE eating up your ad budget?