How Much Should You Spend on Advertising?

I was talking with a business colleague recently about advertising. We were lamenting the fact that many small business owners do not plan or execute their marketing very well and as a result have a difficult time making their businesses stable and profitable.

In my experience marketing tends to be a low priority for many small business owners. After dealing with operations and employees and cash flow and every other issue that pops up on a regular basis, there seems to be little time or energy or money left for marketing. This is too bad because marketing goes to the heart and soul of every organization.

Many companies produce top quality products or services but they fail to survive because they lack enough customers. They lack customers because they never deliver the right message to enough of the right people.

Too many new businesses fall into the "if we build it they will come" trap. Whether you run a mega-retail store or a one-person shop, if you don't let people know what you do and why they should do business with you, then they won't.

This is especially difficult for new businesses because they usually have the most difficult cash flow challenges. Too often I'll talk with new business owners who complain they have no customers so they can't afford to advertise. What they fail to realize is they need to invest more during their startup phase. They need to view advertising as a critical expense just like paying the rent, hiring employees, filling the shelves, etc.

So, if local businesses are to promote themselves effectively, how much should they spend on advertising? It's a good question because if more small business owners had some specific guidelines I think they'd make advertising a higher priority.

I have heard a lot of numbers that small business owners should use to guide their spending. For local, retail businesses that target a local audience, I think 4 to 8% of desired gross revenue is a good range to consider. For newer businesses or those wanting to grow faster, the higher end of the range is best. For mature businesses with strong awareness in their community, the lower end of the range might be appropriate.

Notice I said the expenditure should be a percentage of DESIRED revenue. If your business is new or growing then your current revenue is not as important in thinking about ratios like these.

What do you think? Does your business or profession or industry have a certain ratio used to plan marketing expenditures? If so, please let me know so. This would be useful information to share.