Question

1. You have $5 million dollars to market your product or service from the INC5000 list. How will you justify the expense for distribution and advertising expense and integrate that expense into your company’s portfolio?

Answer 1

The advertising budget of a business is typically a subset of the larger sales budget and, within that, the marketing budget. Advertising is a part of the sales and marketing effort. Money spent on advertising can also be seen as an investment in building up the business.

In order to keep the advertising budget in line with promotional and marketing goals, a business owner should start by answering several important questions:

1. Who is the target consumer

Who is interested in purchasing the product or service, and what are the specific demographics of this consumer (age, employment, sex, attitudes, etc.)? Often it is useful to compose a consumer profile to give the abstract idea of a "target consumer" a face and a personality that can then be used to shape the advertising message.

2. What media type will be most useful in reaching the target consumer? These days, a small or mid-sized business will not only consider print, radio, and television ads, but -- more importantly, perhaps -- the Internet as a way of reaching customers.

3. What is required to get the target consumer to purchase the product

Does the product lend itself to rational or emotional appeals? Which appeals are most likely to persuade the target consumer?

4. What is the relationship between advertising expenditures and the impact of advertising campaigns on product or service purchases? In other words, how much profit is likely to be earned for each dollar spent on advertising?

Answering these questions will help to define the market conditions that are anticipated and identify specific goals the company wishes to reach with an advertising campaign. Once this analysis of the market situation is complete, a business must decide how best to budget for the task and how best to allocate budgeted funds.

Figuring out how much to spend on advertising should begin with your sales revenues. The cost of advertising will be paid for by sales and increasing sales is your goal of an ad campaign. Therefore, there are two formulas that the SBA recommends small businesses use when deciding how much to spend on advertising:

1. How much money do you need to promote the sale of a certain product at a given price? The SBA uses the example that if you spend $10 of the selling price of an item that cost $300 on advertising, then you should be willing to spend $3,000 in advertising to sell 300 units and generate $90,000 in sales.

2. The other way is to set aside a flat percentage of your total projected sales revenues for advertising. So if you plan to dedicate five percent of your revenues and you expect to bring in $100,000 in sales that year, you would spend $5,000 on advertising.

Once you have a handle on how much money you plan to budget for advertising, you need to figure out when you should spend that money during the next 12 months. The SBA has free sample worksheets and templates that you help you budget for advertising. While the plotting of this data may be time-consuming, it can help you compare your actual sales against the goals you set in crafting your advertising strategy. This way, you can decide whether to make changes.