Successful Sales Budgeting
Businesses have many ways to calculate their advertising budget. Advertising
budgets are most often based on any or all of the following:
- Industry averages
- Last year’s advertising budget
- Competitor’s advertising budget
- Previous advertising budget
- Percentage of sales minus overhead
- Friends or relatives’ recommendations
All of the above methods are ineffective for realistically planning a
long-term advertising budget. Furthermore, they leave out essential marketing
tools, such as sales projections, market analysis, pricing, and product changes.
A successful formula for establishing an advertising budget is to float a
percent of sales based on profit margin. This formula is very simple and
effective. The higher the profit margins, the higher percent of the sales can be
spent on advertising.
The formula has two steps:
1. Determine sales projections for the next six months.
These projections need to be based on a realistic market analysis.
- Analyze which aspects of the market have changed since last year’s
sales. Make note of whether the market’s makeup or size has changed.
- Consider any changes your competition made in the last year and how those
changes might affect your future sales.
- Study any new products or services introduced in the last year that may
affect your sales.
2. Determine the average Gross Margin of Profit (GMP)
The Gross Margin of Profit is simply the cost of product or service divided
by the product or service’s sales projections. This amount is then subtracted
from 100%. The balance is the GMP.
Example: A store’s sales over the last year were $1,000,000 and the cost of
their product was $600,000. $1,000,000 divided by $600,000 = 0.6. Subtracted
from 100%, the GMP is 40%.
Based on the GMP, the following chart illustrates what percentage of the
budget should be used for advertising:
| GMP % OF BUDGET FOR ADVERTISING |
| 20 % |
1.4% |
| 21 % |
1.5% |
| 22 % |
1.6% |
| 23 % |
1.7% |
| 24 % |
1.8% |
| 25 % |
1.9% |
| 26 % |
2% |
| 27 % |
2.2% |
| 28 % |
2.5% |
| 29 % |
2.8% |
| 30 % |
3% |
| 31 % |
3.2% |
| 32 % |
3.5% |
| 33 % |
3.7% |
| 34 % |
3.8% |
| 35 % |
4% |
| 36 % |
4.2% |
| 37 % |
4.3% |
| 38 % |
4.5% |
| 39 % |
4.7% |
| 40 % |
4.9% |
| 41 % |
5% |
| 42 % |
5.2% |
| 43 % |
5.4% |
| 44 % |
5.6% |
| 45 % |
5.8% |
| 46 % |
6% |
| 47 % |
6.2% |
| 48 % |
6.4% |
| 49 % |
6.7% |
| 50 % |
7% |
Most grocery stores operate on a 21% GMP, therefore spending 1.5% of sales on
advertising.
Understanding and utilizing this formula will help you develop an accurate
and successful advertising budget based on market analysis and your available
resources.
Author: James A. (Jim) Baker
James A. Baker is the Chairman and Founder of Baker
Communications. Baker is a sales training and
development company specializing in helping client
companies increase their sales and profits. He can
be reached at 713-627-7700 or
jim.baker@bakercommunications.com.
