Thread: What Should You Spend on Advertising?

It's a ticklish question for every company. See what your rivals are doing, and then think about what's going to be effective...

One of the questions I'm frequently asked is: "How much should my company spend on marketing and advertising?" It's a conundrum that vexes many corporate leaders, from emerging entrepreneurs to seasoned CEOs. Unfortunately, instead of seeking a rational answer to the question, many of them just ignore it and hope it will go away.

As a rule, emerging companies focus most of their time and talents on meeting the needs of customers, as well they should. If they don't take care of the customers they already have, everything else will be academic. Strangely, however, many neglect the function of winning customers in the first place. Others naively assume that if they simply provide excellent products or services, their reputation will precede them. Call it the "build a better mousetrap" syndrome. But the world has too many other things to do with its time than beat a path to your door. That means you need to structure your profit-and-loss statement in such a way that you can profitably allocate a reasonable percentage of your revenue to marketing.

THE BIG QUESTION: HOW MUCH?

While there is...

What Should You Spend on Advertising? - BusinessWeek

What do YOU spend on advertising and why?

... While Wal-Mart (WMT) might spend a meager 0.4% of sales on advertising, the sheer size of the company turns that tiny percentage into a significant budget. Wal-Mart's nominally higher-margin competitor, Target (TGT), spends closer to 2% of its sales on advertising, while Best Buy (BBY), as a specialty retailer, spends upwards of 3%. Finally, more upscale stores like Macy's typically spend on the order of 5%.

The same kind of ratios can be seen in the car industry (automakers' generally spend 2.5% to 3.5% of revenue on marketing), liquor (5.5% to 7.5%), packaged goods (4% to 10%), and every other industry.

If you're in a services business, you might want to bump your starting point higher than 5%. For example, like most professional services firms, my company is more margin-oriented than volume-oriented, so fueling its growth requires that we spend a higher percentage of our revenues. Last year, our number was just over 8%, and I've seen companies spend upwards of 15% when warranted—especially young companies that need to invest to build their brand.

Web sites are a high margin business. I think 10% is a pretty good baseline, with another 10% on top of that if you hope to grow.

If you're launching a major new portal, you're going to see numbers far in excess of 100% for quite some time.