Budgeting for Advertising, Marketing, and Sales

Here's a long discussion of marketing strategies and advertising budgets. December 21, 2010

What percentage of revenue do you spend on advertising? While I get much of my business (residential built-in cabinetry) from my web site and other internet presence, it's not nearly enough these days. Other forms of advertising (style mags for instance, and trade/home shows) cost more but bring less return. So I'm trying to look at the whole despite the uneven performance of the parts. When evaluating a single campaign, let's say 3 ads in a monthly magazine costing $1800 total, how much revenue should I want from that $1800 expenditure for it to be worthwhile?

Forum Responses
(Business and Management Forum)
From contributor P:
I would go slow on the magazine ads.

The way I look at it, you want to reverse engineer your profit and loss statement. In other words, if you want to spend 10% on advertising, then 1800/.1 = 18000. You have to run the ads for a period of time to get a return, so how about 6 mo at 1800 or $10,800/.1 = 108,000. Do you think that you are going to get that kind of return? You could decide you are a marketing driven company and charge 30% more to pay for the advertising, but your business doesn't look like a Closet World type of operation.

I would go with a smaller cost ad - a newspaper maybe. But the absolutely most effective advertising you can do is to send a mailer monthly to your former customers. When you find something that pulls, keep taking 10%, say, off the top and putting it into advertising; the idea is you force growth this way.

From contributor D:
I would avoid print media in all forms - who even gets magazines these days? And newspapers? Don't get me started on the dead tree media.

From contributor U:

I have had 10% of revenues as a target budget for many years. It was difficult to impossible to achieve using print media. With Adwords and the right website, it's a breeze.

From contributor I:
Contributor P, that is exactly what we do here - Closet World operation. How does that differ as far as advertising expenditures? We have operated at 10% of gross revenues kind of blindly. Is there a different approach?

From contributor P:
I'm not an expert... There is an idea that a company can either be manufacturing driven (most of us) or marketing driven. The manufacturing driven company relies on its ability to offer more customization and spends a lot less on advertising. The marketing driven company offers fewer choices that are easily produced and makes up for the limited selection with advertising and commissioned salesmen.

From contributor M:
We spend less than 1% of revenue on advertising, and have the greatest advertising money can buy - satisfied customers. That's a sales force in the hundreds for us.

From contributor K:
There's no hard and fast rule as to what percentage of revenue advertising should be. 10% seems to be a common figure, partly because it is easy to work with. But it is somewhat situational - a new company trying to get established will need to spend more (as a percentage of revenues) than one who already has a presence in the market. I propose that as your revenues increase, the initial percentage possibly may decrease. Be careful with how you look at the mathematics; the 10% in discussion is of your current revenues, not of the anticipated but unknown additional revenues. Another way is to ask the question: If I spend "x" dollars, how much additional gross revenue (or how many more jobs), taking into account my average percentage net profit, will that advertising have to generate to pay for itself, or better yet to create additional profit?

No one form of advertising will be sufficient for most businesses. So you have to find what works for you and keep testing. Here's my take on the various methods.

Yellow Pages - still absolutely necessary. But don't try to "out-ad" your competition. That can get too expensive for the return on the cost.

Internet - More and more, absolutely necessary. And it is not expensive at all. But there are rules that, if not followed, will drive potential customers away rather than bring them to you. One of the cardinal rules is that it has to be easy for someone who has not heard of you to find your website.

Newspaper - Expensive and, for the woodworking industry, seemingly generally ineffective. Unless you are advertising a "Mother's Day Special!" or something similar.

Magazines - Very expensive and if you are a local company advertising in a regional or national magazine, the results will probably be disappointing to negligible.

TV - Worth a try, but usually requires repetitive runs to be effective. Sometimes package deals are attractively priced. But sometimes packaged deals have your ad running at 2AM.

Radio - Tends to be expensive, and you have to make the listeners want to take the next step right now! Otherwise you may be forgotten.

Local trade shows - Can be very effective, especially if you can display your wares. You have to have hand-outs that the passersby will keep. And you have to acquire names of interested show-goers and do follow-up.

Direct mail - Highly effective if done well. Once the process is set up, easy to do again. Inexpensive. After initial setup, the price of postage plus printing costs.

Advertising has only one purpose: to induce interested parties to seek you out to allow for further opportunity for you to convince them that they do indeed desire your product and that your company is the one for them.

Word of mouth - Great advertising and extremely inexpensive. But why be passive about it? Work to make each and every customer an advocate for you.

E-mail - It will either have a very high results-to-cost ratio, or it will be a (figurative) time bomb ready to blow up on you.

From contributor B:
I teach a seminar that discusses the very topic you are asking about. To understand better what works and what doesn't in advertising, it's important to look at what advertising does and does not do.

First, advertising does not sell jobs, nor does it put you in any kind of a superior competitive position within your market. What it does is generate inquiries. That's where advertising's job stops.

Everything that happens after that initial phone call or e-mail or walk-in is part of the sales process, not part of advertising. So if you break down your costs as a cost per inquiry and not a return on investment, you can better determine what works and what doesn't in your market for the various advertising tools you have available.

Once you have an inquiry, no matter if it was a referral, a walk-in, a cold call, a web site hit, or one that is generated from paid advertising, you begin to mutually determine if it might make sense to move forward together. If an inquiry, for instance, has a bathroom remodeling job and you are not in that business, the conversation will likely come to a quick end. However, in your case, if an inquiry wants to talk built-ins, the odds are you'll probably go to the next step. Now, if their budget is $500 and your solution sells for $5000, the conversation will probably end just as quickly. You cannot control who inquires with you, nor can you control how much money they have to devote to a project.

So, if you intend on using sales volume as a barometer or ROI in small numbers, there is a great danger that the sale amount will skew your results. Five sales that average $500 per sale will give you a much different ratio than five sales averaging $10,000 per sale. If you use sales vs marketing/advertising costs over hundreds or thousands of jobs, you'll then be able to much better predict what kind of ROI you'd expect from any given advertising buy.

That doesn't mean you have to move forward blindly. You just have to know your costs. Your costs in advertising and marketing come in at least two forms. First, and easiest, is how much you spend on direct advertising buys. Second, and a little more difficult to determine, is the time "dollars" you invest to execute your advertising and marketing plan.

If we use your website as an example, you undoubtedly have some kind of monthly fee you pay your site hosting company. In addition, you probably had some cost in the photography and/or artwork on your site. If you didn't pay a professional to design and set up your site turnkey, and you did it yourself, you have a certain number of hours in R&D and design time, plus the time to maintain and update your site on a periodic basis. If you take those hours and multiply them by your shop rate, you have a good working number to begin with.

Now add your hard and soft costs for your website together, and divide by the number of inquiries you have gotten to date to determine what your cost per inquiry is. You can do the same with any other advertising you buy. If you add everything together (all ad buys, all website hard and soft costs and anything else that is advertising or marketing specific) and divide by the number of inquiries from all sources, you'll have an average cost per inquiry.

That average cost per inquiry is your benchmark. It's what you can use to compare any ad campaign or marketing campaign or any other lead source to each other. When you beat your average with a particular method, look for ways to increase the inquiry volume within that method. If you find a real dog - a method that is far above your average cost per inquiry - the math will tell you not to repeat that same thing the same way.

All the above is meaningless if you don't actively record each inquiry's source by asking "How did you hear about us?" Then you must do the math to determine your cost to get that inquiry.

If you don't, you're relegated to repeat the same mistakes over and over and over again, without much of a clue on what really works and what doesn't.

With all that background, what percentage of gross revenue to spend in advertising and marketing is more a matter of your needs and the type of client you are serving and/or want to serve. If you are working with a small number of clients where you have reliable repeat business on a monthly/quarterly/annual basis, your ad costs can be fairly small to maintain what you have. All you really need to do is replace those steady, repeat customers that drift away for whatever the reason. If, however, you work in a market with clients that are rarely repeat customers (most direct to homeowner shops fall in this type), you will find yourself constantly looking for the next new client. Those advertising costs will almost always be larger percentages of gross. It's not uncommon in those kinds of markets for successful shops to devote 5-10% of their gross to direct advertising/marketing costs. If you are just getting started, that figure might need to be a larger percentage to get a faster start.

Look at advertising and marketing expenses this way. It's a common and necessary practice for your current customers to pay your expenses for finding your next customers. Advertising and marketing expenses are part of your cost of doing business. If you intend to use a percentage of gross, you have to find a way to pay for it. You'll probably need to raise your pricing according to how much you want to devote to your ad/marketing budget, unless you want to take that amount out of your salary.

It might be scary the first few new quotes you send out with your new added 5-10% advertising costs included, but you'll still get your fair share of those quotes. Just make sure that if you begin to add the ad costs to your quotes/rates, you begin to spend those dollars as you intended on as consistent a basis as is possible. Steady, easy, consistent ad expenses will yield a steady, easy consistent flow of inquiries.

The ball's in your court. You are the only one who can make the decision on what to buy, how to pay for it and how to track your results. Tracking your results will put you light years ahead of your competition and will ease your management burden significantly. You are the one who will make that decision for your company and its future.

From the original questioner:
Thanks all for your input. Contributor K, your comparison of ad types is very useful. And contributor B, that's the big-picture type of analysis I'm trying to apply. I've been spending well less than 10% of gross, and now plan to increase that. I expect an improved advertising plan will be the best outcome of the three-week slump I just endured.

From contributor Q:
The most effective advertising is the one that puts you closest to your targeted prospect at their time of need. Face-to-face is the most lucrative. The farther away from the prospect and their need, the less effective, which is why you need a consistent long-term campaign for print media to work.

Direct mail and home shows (and street shows - same demographic, but at much less cost and usually held the time of year people are most likely to spend) can be extremely effective if they are done right and offer the most bang for the buck.

As far as figuring budget, 10% of gross sales can make the jobs unprofitable, and end up costing you money. The money must come from your company profit, or you must annualize your marketing budget and build it into your costs, and stick to your budget, but this means you must also put it aside from every job.

From contributor B:
To get a true, valuable comparison, it's important not to mix up sales results with cost per inquiry.

To contributor Q's point, home shows and street shows are really a combination of advertising and sales. Your display itself and all the costs of renting the space, staffing your booth, etc. are advertising/marketing expenses. When someone approaches your booth and begins to talk, you have an inquiry. Once you respond, you have shifted from advertising to sales.

If you use the formula I recommend, you will count up all your inquiries from your exhibition and divide them into the total costs of your time and money invested in the show to arrive at a cost per inquiry. Compare that cost against your average benchmark cost to determine where it falls. The same is true of direct mail (printing, list cost, time "dollars", postage, etc.) when the costs are divided by the number of inquiries.

An inquiry is an inquiry. Certain inquiries will turn into leads. A lead is where there appears to be a job you'd like to pursue. You can further calculate the percentage of inquiries that convert to leads. In the examples I cited above, the bathroom remodeling inquiry is only a lead if you are in the bathroom remodeling business. The built-in inquiry would be a lead, even though the prospect's budget isn't large enough to make it a sale.

As an example, if you have 10 inquiries and determine early in the sales process there are 4 leads, your conversion percentage would be 40%. If you pursue those 4 leads through the rest of the sales process and sell 2 of them, you have a 50% closing ratio. You also have a 20% inquiry to close ratio. That means 4 of the 5 inquiries you generate fall to the wayside somewhere in the sales process. There are always more that evaporate from the sales process than you close. So, in the above example, you need to generate 5 inquiries to get a single sale.

Some helpful percentages to calculate are your conversion ratio from inquiry to lead by each campaign and for all your advertising/marketing activities in aggregate. You'll probably find that certain ad campaigns/marketing activities convert better than others from inquiries to leads. Of course, you can figure a cost per lead as easily as you can calculate your cost per inquiry.

So, what's the best form of advertising? In my opinion it's the one with the lowest cost per inquiry that converts to a lead at an above average rate. You'll need to do the math to figure that out for your business.

From contributor P:
To the original questioner: You do some cool stuff. Your stuff doesn't look like it lends itself to conventional advertising. How do you get your work now? You might be getting the cart before the horse. Before you start shelling out a lot of money on advertising, you might want to step back and take a look at your marketing and really get an understanding of where you fit into the marketplace and where you can go. I recommend Guerrilla Marketing.

From the original questioner:
Thanks for your positive feedback. I've gotten most of my work over the last five years from the internet, specifically my presence on custommade.com, which gets strong Google search results, for me at least. The paradigm that has worked best for me is this: a well-educated consumer who knows more or less what they want goes directly to Google to start their search for custom cabinetry, finds me, and we exchange a series of e-mails. I provide pricing information before even visiting their home, and if they provide a photo of the space, I often do a simple elevation and send a formal proposal for the job. Every project I've gotten this way has resulted in a satisfied customer, and I'm very proud of that.

My pricing is competitive but by no means on the low side - probably on the slightly higher than average side, if anything. Lately, I know prospects that I would have won over without competition a couple years ago are now getting 2nd and 3rd bids and I've lost at least a couple jobs due to small price differences. My overhead is relatively low, (rented space, and I own my used machinery) so I've been able to kind of scrape by even over the last 2-3 tough years (mainly because my wife has a good job). But this approach does not yield enough to keep even a small two-person shop sufficiently busy. So I know I need to do more.

I do know the internet will continue to provide good results for me. I have a Google Adwords account, but have used it off and on. When it's been on for a month, I've gotten no indication that any of the visits to my website, the hits for which I am charged, have converted to an inquiry, either e-mail or phone. I know because I didn't get any inquiries that month! (This has been consistently true, such that I can't help being suspicious of the Adwords program.) Plus, my own internet presence often comes up on page one of many Google searches anyway.

I think the bottom line is that I do need to put more dollars into whichever ad media will yield the best results. For example, I've been ambivalent about graphics for my van, but just went ahead with a significant purchase that features my web address. I think it was a mistake to not do this right when I got my domain name a few years ago, and will be surprised if I don't get inquiries quickly from the van graphics. And I should probably re-do my own website to better optimize it, since it was built by an amateur. Again, thanks to all for the thoughtful contributions.

From contributor P:
I would look more into marketing if I were you. If most of your work in the past came from the internet, then improving the website is a no-brainer. The disparity regarding Adwords between what you say and what contributor P says doesn't add up.

The graphics on your van... Why not? Tawdry? That is short money with tremendous exposure.

One important aspect of marketing is to understand the emotional reasoning of your customer. One tool for getting this information is surveying. That is part of marketing. Marketing/surveys done correctly will find the vein of gold. Done incorrectly or not at all, you are using a shotgun.

From contributor O:
Just a goofy little note. I worked for a company that spent good money on magazine ads (3-4K/month). I went to a customer's house that had a community newsletter on the counter. It was a large retirement community in the upper price range. I researched it and placed an ad. The ad there was $50. Simple black and white with a nice line drawing. Kept me busy for 2 years.

From contributor N:
I have reviewed your website and also read all the posts on this thread. I too started out with a 2 man shop and struggled to grow in the beginning. I think 3-5% advertising budget, unless you are a new startup company.

There are so many things you can do that cost so little money. The key is networking. Many of the items you think you want to do may be a big waste of money. I can tell you first hand, and I have tried just about everything.

I would recommend you start small and keep accurate records of your response, the number of leads, and the number of jobs created. Keep this little black book to help direct you towards future advertising expenses.

From contributor Q:
By 3-5%, I am assuming you mean 3-5% of gross sales. That is not the way to do it. If a small shop has annual sales of $150K-$200K, that would mean they would only be able to spend $4500-$10,000 per year. That doesn't get you much, advertising wise.

The best way is to define your advertising vehicle (i.e. - magazines, Yellowbook, home shows, direct mail, etc.), then get the costs for it, and add it to your base costs per job. Now this money must be assigned (not spent elsewhere) to advertising.

From contributor N:
Contributor Q, I must disagree with your comments. First of all, 3-5% is a rough, rule-of-thumb number. Did you say to worry about how to pay for it later? That doesn't make much sense to me. I would say you want to put together a reasonable advertising plan based on some percentage of gross sales. If you don't do this, your numbers may be more than your company can afford.

An example: The company's gross sales for 2009 was 500,000. The company is brand new and wants to be fairly aggressive in their marketing plan. The consultant (me) recommends they allocate approximately 8% of their gross to marketing. So about $40,000 should be where you want to be with your overall marketing plan. $500 per month Adwords ($6000), Yellow pages $200 per month ($2400), newspaper ad at $200 per week for 50 weeks ($10,000), mailings at $400 per month ($4800), three tradeshows at $5000 per show including displays and all expenses ($15,000), national magazine advertorial ($2200).

From contributor Q:
"Did you say to worry about how to pay for it later?That doesn't make much sense to me."

No, that wasn't me, and as a matter of fact it is the opposite of what I said. That type of thinking is what leads to the robbing-Peter-to-pay-Paul cycles that kill so many small businesses, and the stress that exacts a toll on the individual is more costly, in my opinion.

Using 3-5% as a rule of thumb is exactly why you shouldn't do it that way, because in your consultant example, you increased it from 3-5% to 8% (an increase of 38-68% or using $500K previous sales in your example, an increase of $15-$25K). If they had used the rule of thumb of 3-5%, they would have been off and not been able to pay their expenses. Arbitrary numbers do not work.

This is why I said you need to define where your target audience is and what vehicle you are going to use, determine what it will cost to reach them, and add it to your base numbers. You then need to sequester that money out of each job for that purpose, and it will tell you exactly how much needs to be budgeted for.

If you are working your leads (including farming your customers warm market after the completion of each job - remember they invite family and friends over to see their new whatever), you will find that the overall number will decrease through no increased advertising. That is known as bang for your buck!

The actual money comes from your company profit (which means you need one and have one budgeted for), or annualized into your costs (the better method). But this money, like taxes, must be sequestered for its intended purpose or you will find whatever advertising campaign you are running will run into jeopardy (and effectiveness) from robbing-Peter-to-pay-Paul cycles.

The only advertising we do is home and street shows (people come to these events to buy things), referrals, and community advertising. We've never found yellow pages to be very effective for us, and if you are not among the top four sized ads, chances are greatly reduced that you will receive a call (think about the last time you used it). But all your advertising should have tracking components in it. For print, have a code in it for the customer to reference; for home and street shows, have a drawing.

In your contact database (a simple one to use is ACT, or you can even use Quickbooks), have a field that tracks where the lead came from and another field that identifies if the person is a customer or a prospect. Do reports based on the two fields, and you will see where your advertising is most effective and adjust accordingly. This takes minutes to do.

From contributor N:
I think we are essentially saying the same thing. Plan your advertising based on the best mix of what works for you. Come up with a plan and act on it. Also (the most critical part), track every advertising expense completely, so you know what your advertising is getting you. I think your plan is a little too disciplined for some people.

From contributor Q:
"I think we are essentially saying the same thing."

Not really. You are coming up with an arbitrary number to use (whether it is your rule of thumb 3-5% or consultant 8% based on the $500K). As a matter of fact, your consultant example showed exactly why a rule of thumb is not the way to do it. If the company with $500K in sales used your original rule of thumb of 3 to 5%, they would have had a shortfall of $15-$25K, based on what they actually needed.

The difference is I am using the real number based on the need, and that number could end up being a smaller percentage of the overall budget in the process. If you use a rule of thumb each year of 3 to 5% or 8%, it may not meet your need.

"I think your plan is a little too disciplined for some people."

That plan is basic business planning. It is not any more disciplined than coming up with a number to accommodate for an employee in your annualized budget. It is the exact same.

The discipline is sequestering the money for the intended need, and in my opinion, the reason a lot of shops have this issue is they think if they get paid and the bills are paid, they are okay, and do not take into account a company profit. They will ride their credit lines, instead of having the resources to take advantage of vendor discounts of 2-3% for paying on time or before whatever cutoff date they set.

I know this, because we used to do the same years ago. I bring this point up a lot because I know what an effect it can have on your business and personal life.

From contributor N:
I still say we are essentially doing the same thing. After 32 years in business I typically spend 3-5% of my gross. For my overall advertising expense, what I suggested earlier - the 8% - is for a startup company. I was suggesting that a new company will probably allocate 5% to 10% of their gross for overall advertising expense. I typically try to diversify my advertising and not to just go to three home shows and call them my overall advertising plan.

I do not like the yellow pages either, but would suggest a small investment in that category because it assists in the overall plan.