How much should I be spending on advertising?
One of the big questions we often hear when talking to new advertisers is the question of how much you should be spending on advertising. The answer is always, “That depends.” It depends on your industry, your business size, your annual sales, your average price per sale, your location, your competition and your purpose for advertising. As mind boggling as it can be to juggle all those concepts in your head, an easy way to get a general idea does exist: Ad-to-Sales Ratios.
Ad-to-Sales Ratios are defined as advertising expense divided by net sales (after discounts and allowances) as a percentage. In service industries, net sales is revenue or gross income or other measure used by accountants as the “top line” of the income statement.
Ad-to-Sales Ratios vary greatly by industry. For example, an educational service company has a fairly high ad-to-sales ratio of 12.2. This could be due to the fairly limited market of potential customers, as the more niche and targeted your audience, the more difficult and expensive it costs to reach each potential customer. But then again, more general reach stores such as jewelry stores and furniture stores have ad-to-sales ratio in the 6% range. Broader potential audience, but then again, also a higher product cost. A broad reaching, low product cost store such as a show store can get away with spending 2.6% of its net sales.
By seeing how much other people in your industry spend as a percentage of their net sales, you can make sure your advertising plans are on the right track.
Click here to download: Ad Spending Ratios by Category 2009
Entry filed under: Market Conditions.