“How much should I spend on advertising to get results?” This is one of the top 3 questions I get from prospective advertisers. It’s a worthy question. It’s a moment of truth for any business owner. Advertising can be a scary proposition. Business owners know they need to do it. They’ve seen or heard the results of others in their industry or tangential industries who’ve had wild success with it. But they’ve also heard the horror stories, that it can be expensive and that it’s difficult to measure its effectiveness or connect it directly to the impact on their business.
So how much should you spend? Many advertising reps will spat off the tired line about “the small business administration recommends that you should spend 5-6% of gross revenue on advertising.” Who came up with this?
To look at it a different way, substitute the word exercise for advertising. If someone were to ask you, “How much (effort/time/money) should I spend on exercising to get results?”, what would you say? A natural response might be, “what do you mean by ‘results’?” Some people consider dropping a few pounds as “results”. Others consider “results” to be able to do a triathlon or a marathon. It’s the same with advertising. It’s up to you to quantify what you consider results.
There is no such thing as “low risk / high reward”
In 20+ years of seeing hundreds of different business models, I have come to realize that it comes down risk tolerance, efficiency of operation, and customer experience. The more aggressive you get, the higher the risk and the higher the return. One of our local clients in the home services category spends 22% of revenue on advertising. He runs an efficient operation and his customer’s experience is phenomenal, (his referral rate is 55%), which means that each new customer earned is like 1 ½ new customers, and those referred customers refer others and so on. His risk tolerance is higher and he fundamentally believes in advertising …aggressively. One of my real estate clients spends 25% of revenue on advertising. Nationally, experts estimate that Red Bull spends as much as 40% of revenue in marketing. Advertising that is well planned and executed is a 100% tax deductible investment in growth. And if you don’t invest in your brand and tell your story, how do you expect your customers to invest in your company and tell your story?
Instead of asking “How much should I spend on advertising to get results”, do what any good investment advisor would do: assess your risk tolerance. Ask yourself these questions instead: “What is my risk tolerance”, How committed am I to growing this business? How aggressive can I afford to be?” Once you’ve done that, do the following:
- Calculate an annual advertising budget based on 12-months.
- Create a plan to invest that money.
- Determine the media that will give the highest and best use of your money
- Book that media
- Say NO to all other advertising for the next 12-months