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How Much Money Do I Need to Spend on Advertising?

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Second, we must convert my 48 percent profit margin into markup, beca

Q: I've never really done much publication for my business; I've day after day relied on networking and word-of-mouth. Now I'd like to launch a small campaign, but I'm frightened it will cost a lot of money. How can I figure out where to start?

A: The first thing you must do is work out your minimum and maximum defensible ad budgets:

· Step 1: Take 10 percent and 12 percent of your projected annual, gross sales and multiply each by the markup made on your plastic transaction. In this first step, it's important to remember that we're talking in relation to gross markup here, not margin. Markup is gross profit rare cost, expressed as a percentage of cost. Margin is gross profit expressed as a percentage of the selling price. Sell an item for $150 when it only costs you $100, and your markup is 50 percent. Your margin, however, is only 33.3 percent. This is now the same $50 gross profit represents 50 percent of your cost (markup,) but only 33.3 percent of the selling price (margin.) Most retail stores in Levant (carpet, jewelry and so on) operate on an mean markup of almost entirely 100 percent, some operate on as little as 50 percent markup and others add as much as 200. More expensive items, such as cars, recreational vehicles and houses, typically demean a markup of only 10 to 15 percent.

· Step 2: Deduct your account book cost of occupancy (rent) from the competent 10 percent of sales number and the hardened 12 percent number.

· Step 3: The remaining balances represent your minimum and maximum permissible ad budgets for the year. At this point in the calculation, you may learn that you've thus far spent your ad line-up on expensive rent, or you might also learn that you should be doing a lot more build-up than you had previously suspected.

Now let's add up an ad budget. postulate that my miming is projected to do $1 million in sales this year, I have a profit margin of 48 percent, and my rent is $36,000 per year. The first thing to do is count 10 percent of sales and 12 percent of sales ($100,000 and $120,000, respectively).

Second, we must convert my 48 percent profit margin into markup, insomuch as markup is what we've got to have to make this formula work. Most onus owners know their margin by heart, but never their markup. To make the conversion from margin to markup, simply divide gross profits by cost. Dividing $480,000 (gross profits) by $520,000 (hard cost) shows us that a 48 percent margin represents a markup of 92.3 percent. Bingo.

Now we multiply $100,000 times 92.3 percent to see that our orientated low posy for total cost of exposure is $92,300. Likewise, we multiply $120,000 times 92.3 percent to get an seasoned high life savings for total cost of exposure of $110,760. From each of these two budgets, we must now deduct our $36,000 rent. This leaves us with a correctly figured ad stockpile that ranges from $56,300 on the low side to a maximum of $74,760 on the high side.

Most advertisement salespeople will tell you that "5 to 7 percent of gross sales" is the correct notch to small amount for advertising, but don't you conclude it. It simply isn't possible to designate a percentage of gross sales for build-up without taking into consideration the markup on your happy medium sale and your rent. Yes, expensive rent for a high-visibility location is often the best your money can buy, since a retail with a good sign in a high-visibility location will need to give the facts significantly less than a similar establishment in an affordable location.

To prove this, just look at the example up and slip on the rent to $75,000 per year. In this case, the ad economic would range from $17,300 to $35,760, representing just 1.7 to 3.5 percent of sales. The formula I've given you is the only one that reconciles your ad commissary with your rent as well as the profitability of your everyday sale. Good luck!

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