The Advertising Budget

This section will concentrate on how to prepare a written, detailed advertising budget. This differs from a budget that details specific dollar amounts for anticipated receipts and expenditures, usually handled by a certified public accountant (CPA) or other financial advisor. These professionals seldom do more than allocate a specific amount for advertising and treat it the same as rent -- i.e., as an annual expense item.

Returning once again to the marketing approach, a sound advertising budget should be based on consumer habits and preferences. Unfortunately, most retail advertising today appears as an attempt to solve a store's problems. Promotions reading We Are Overstocked, We Must Reduce Inventory and Our Loss Is Your Gain are commonplace and do very little to stimulate the reader to action. The first requirement of successful advertising for the retail store is to work toward solving the consumers' problems. This publication's approach to preparing an advertising budget will, therefore, be based on the following assumptions:

• Timing of advertising will be determined by consumers' preference for buying rather than when the store would like to sell.
• Items to be featured in advertising will be selected on a basis of probable popularity with customers rather than on a store's desire to reduce inventory.
• Headlines and copy for advertising will always be customer-benefit oriented.
• Any medium will be selected on its ability to reach the right prospects. Personal favorites and prejudices prevent objectivity in media selection.

The complete advertising budget must provide specific written answers to each of these questions:

• How much should I spend?
• When should I spend it?
• Where should I spend it?
• What media should I use?

How Much Should I Spend?

Since the cost of advertising must be paid from sales revenue, it should always be expressed as a function of expected sales dollars. The two most popular approaches are

1. The number of dollars considered necessary to successfully promote the sale of a given item at a given price. (Example: $10 of the $300 selling price for each refrigerator will go to advertising so that $3,000 in advertising should sell 300 units and produce $90,000 in sales.)

2. A flat percentage of every anticipated revenue dollar will go toward advertising. (Three percent of an estimated $100,000 annual sales volume will result in an advertising budget of $3,000.)

This section will concentrate on the second approach because it allocates advertising costs for all product lines. Although fewer than 50 percent of the items carried by most stores are never advertised, their sale is the direct result of customer traffic created by the advertised items and, therefore, all merchandise sold should contribute to the overall cost of advertising.

Setting Sales Goals

In both approaches, the first step in preparing an advertising budget must be setting sales goals. Just how many television sets do you expect to sell in a month, a season, a year? Or what will the retail sales volume for the entire store be in each time frame?

Setting sales goals can be a guessing game, but basic research into past sales performance, the quantity and quality of competition, the economic forecasts for your area and characteristics of the population in your market area can help make the guess an educated one. The U.S. Department of Commerce publishes statistical information about consumer expenditures, retail sales and expense statistics. An hour or two spent in the government publications section of your local public library can pay big dividends. Another source for statistical data is the business association that serves your industry.

Although the first sales goal you set will be an annual figure, monthly sales goals can never be determined by merely dividing the annual figure by 12 months. One of the certainties of marketing is that consumer habits change constantly. Yet those very changes make the consumer predictable since there is a predictable pattern of consumer desire for almost every known commodity. While this consumption pattern may vary from month to month, the annual pattern repeats itself with remarkable consistency. The chart shown in Appendix B will give you an idea of the variation in annual sales patterns for just a few stores. For example, while the average retail jewelry store can expect 23 percent of its annual sales volume in December, the lumber yard or building materials store can expect only 8 percent of its annual sales during the same month. The figures on the chart represent average figures from stores of all sizes and from all parts of the United States. They have been recorded and averaged for five consecutive years, so your store's actual percentages may vary slightly.

Your next step after setting an annual sales goal is to determine what percentage of that annual volume you should anticipate for each calendar month. You may elect to use the national figures for your industry, but using your actual sales figures will give much more reliable numbers. To determine what percentage of your annual sales were achieved in any given month, merely divide that month's dollar volume by the annual dollar value and multiply that amount by 100. Your monthly share of sales percentages will be even more accurate if you compute it for each of your last three or four years of sales and then average the percentages for each month. When you arrive at your monthly percentage of annual sales, you can provide a picture of the cyclical nature of your business by plotting the percentage figures on the graph provided in Appendix C.

The worksheet in Appendix D will be the first step in preparing a written advertising budget for your firm. Fill in the dollar volume for your store for the last year in the upper right-hand corner. Next, enter the annual sales goal you project for the coming year. Remember to consider elements such as inflation, the condition of both the local and national economies, any major changes in your competition and changes you may have made in your store (e.g., expansion, remodeling or the addition of new product lines or brands). Annual sales estimates often are made on a sales-per-square-foot basis, then converted to gross sales by multiplying the square foot index by the total number of square feet devoted to selling space. Using industry indices, you can calculate your share of the market by comparing your sales with estimates of your competitors' sales.

The third item required at the top of Appendix D is the percentage of gross volume you plan to invest in advertising.

Appendix E shows the average percentage invested by 74 different industries including retail and service establishments. Remember, these published numbers are average figures; your location, competition, reputation and market area may dictate an adjusted percentage of sales for advertising. If your firm is new, you may want to double the average percentage figure during the first year just to establish yourself.

By multiplying the projected volume for the planned year by the percentage allocated for advertising, you will arrive at the dollar amount of the advertising budget for the year. You have answered the question, How much should I spend?

When Should I Spend It?

Although you know how much money you plan to invest in advertising, your budget also must indicate how much of that amount to spend during each of the 12 months. Do this by transferring the figures you plotted in Appendix C to the first column of Appendix E -- these are the same figures. Then multiply the projected volume for the year by the percentage figures for each month and insert the results in column two of Appendix D. You now have refined your annual dollar sales goal into a dollar goal for each calendar month.

The final column in Appendix D can be completed in one of two ways. You can multiply the percentage figures in column one times the projected total advertising budget or multiply the projected monthly sales figures by the annual advertising percentage rate. Either procedure will give identical figures for the projected monthly advertising budget column. The completed Appendix D will give you a written guideline that includes your monthly sales goal and monthly advertising budget. If your business is a one-product type, this simple worksheet could serve as your total budget preparation guide. You should regularly monitor your firm's actual performance against these projected goals, and when there appears to be a deviation from the goals, reevaluate the original goals and perhaps adjust them upward or downward.

Where Should I Spend It?

Many firms, especially in the retail field, cannot settle for only the data in Appendix D since, over the years, they may have added several departments with their own sales patterns. The worksheet in Appendix F is designed to target monthly advertising dollars toward the department or item where they will be most productive. Preparation of this worksheet begins with another review of your firm's past sales records. The left-hand portion of the worksheet provides space to record the relative monthly importance of each of three departments. Make up a sheet to provide for the number of departments in your firm and divide the total volume for each month by each department's volume and multiply by 100. This will give you the percentage importance of each department to the total store volume. The totals for all the departments should equal 100 percent for each month.

Figures for the total ad budget column are merely transferred from the third column in Appendix D. Since being unpredictable is perhaps the most predictable of all human traits, we recommend that you build in some flexibility. In this example, the worksheet calls for saving 10 percent of each monthly advertising budget as a reserve fund. This fund will not be used during the year but will be held back for contingency use. It will be nice to have if a 12-inch snowstorm hits the day after your full-page ad appears!

The net media budget column is completed by subtracting the reserve figures for each month from the numbers in the advertising budget column. Finally, complete the columns labeled Departments A, B and C by multiplying the percentage figures on the left side of the page by the figures in the net media budget column. For example, if Department A in your store did 40 percent of the store's total volume in January, you would multiply the net media budget figure for January by 40 percent and enter that figure under Department A on the right side of the worksheet. When this worksheet has been completed, you will have a written guide telling you when each advertising dollar should be spent and on which department (or item) it should be spent. If you prepare and follow the breakdowns in Appendixes D and F, your advertising will be timed to solve consumer problems by matching your maximum expenditures with maximum consumer desires.

What Media Should I Use?

The final step in preparing your advertising budget is to allocate advertising dollars to specific media by using the worksheet in Appendix G, the Media Budget Allocation Form. The worksheet provides a special column for fixed advertising expenditures. Because the monthly costs of advertising in the Yellow Pages, other directories and outdoor advertising signs are fixed costs, they should be subtracted from your net media budget before the remaining dollars are assigned to newspapers, radio stations and other media. The advantage of completing this worksheet is that you will have your total advertising expenditure for an entire year on one sheet of paper.

Preparing these worksheets may seem tedious, but the effort will be well worth your time. If you have a computer, create the budgeting format on your terminal. Automating this procedure will provide a system for tracking the actual sales performance against your targeted goals. Remember, when actual performance deviates from projected performance over a two- or three-month period, it is time to seriously reevaluate the original sales goals.

Performance below projected goals, if it continues, will increase the percentage of sales your advertising is costing while continued sales performance above projected goals may justify higher advertising expenditures.

Whether or not you use the forms presented here, take the time to prepare a written advertising budget for your firm that is based on future sales goals rather than on past years. You will notice the difference where it really counts -- in profitability!

Appendixes