If I had a dollar for every time someone asked me what percentage of their sales they should be spending on advertising, I’d be writing this column from Aspen!
Problem is, it’s simply the wrong question to ask. And I’ll show you why…
Let’s assume that the objective of your advertising is to generate sales. If this is the case (and I truly hope it is) it seems logical that your promotional expenditure should precede sales – and not the other way around. (Surely you don’t make sales just so you can afford to advertise?)
Your advertising expenditure should determine your sales volume. This means that your advertising budget should be calculated by multiplying the number of sales you plan to make in a given period by the amount you need to invest in advertising to generate each sale (your ‘acquisition cost’). So, if you decide you want to double sales, you simply double your promotional spend.
Most organisations use sales volume to determine advertising expenditure because they simply cannot detect a relationship between advertising spend and sales!
If you can’t measure the relationship between advertising expenditure and sales, it’s either because you don’t have a system in place to make such measurement possible, or because your advertising simply doesn’t work.
Either way, building a system to measure the effectiveness of your advertising should be your number one priority.
Your first step is to calculate the amount you are prepared to invest in advertising and promotion to acquire a sale (your ‘allowable acquisition cost’). When determining this figure, be sure to consider the lifetime- rather than the transactional-value of a typical client.
Once you know what you can afford to spend to acquire a sale (or a new client), your next step is to measure what you are currently spending.
To do this you need to record a ‘source’ for every sales inquiry your business receives. It’s best to determine the source of an inquiry at the very first point of contact. Make it compulsory for your reception staff to ask inbound callers what prompted their calls – and add a compulsory source field to any forms on your Website.
If you know the source of every sale, it’s now a matter of dividing the number of sales you receive from each promotional campaign in any given period by the cost of that campaign. This will give you your acquisition cost – itemised by promotional campaign. If your average (actual) acquisition cost is lower than your allowable acquisition cost, you should reinvest the balance into additional promotion. If it’s higher, you need either to find a more cost-effective promotional campaign, or to increase the price of your product.
Once you understand the relationship between promotional expenditure and sales – provided you have promotional campaigns capable of generating sales at or below your allowable acquisition cost – you really can ‘dial-up’ next year’s sales figures.