Helping Retailers Develop a Realistic Advertising Budget

How do retailers develop an advertising budget? Research shows that less than half of independently owned businesses do any sort of planned budgeting for advertising. Good business practice dictates planning is essential to yield good return from the retailer’s advertising budget.

Many advertisers base their advertising strategy on end of the year whims or, worse yet, on last year’s advertising expense. With increased competition for local businesses from national chains, mail order, cable TV and e-business aggressive businesses that expect continued sales growth must exercise initiative in their future advertising and promotion planning. If they want to grow, they have to have an aggressive advertising plan.

Understanding the process of helping an advertiser develop a realistic advertising budget will set you apart from of media representatives. This will help position you as a partner in making the business a success instead of just another salesperson trying to get into a billfold.

The formula many businesses have found to be useful is the floating percent of sales based upon margin of profit. This works best for businesses that sell a product and can identify the cost of goods. The higher the margin of profit, the higher the percent of sales they can afford to spend. The steps to use this formula follow:

Establish sales projections for upcoming months. These projections should be carefully developed using true and realistic evaluations of the market. Begin with last year’s sales figures. Each of the following factors needs to be considered when forecasting sales for upcoming months. Adjust by the influence of:

• Market size changes - Is your community growing? Are you expanding into new markets?

• Market share changes – Has a competitor changed ownership and become more aggressive obtaining some of your customers? Are you after more market share this year? Has a new large competitor entered the market and taken customers from you?

• Price changes – Has the price of the product sold increased or decreased?

• Product line changes – Is the store handling a different blend of merchandise? Has it dropped a brand that Wal-Mart carries? Has it expanded a product line?

Determine the average Gross Margin of Profit (GMP). This is very simply the cost of merchandise divided by store sales. Subtract this percent from 100 percent. The balance is the gross margin of profit. Example: Store sales were $500,000. Cost of merchandise was $300,000. The Gross Margin of Profit (GMP) is 40 percent.

Use the chart on the left to set a benchmark for businesses to establish a percent of store sales to spend on advertising. Multiply the percent that corresponds with the store’s GMP by the projected sales for each month.

Here are some examples: Most grocery stores will operate at a 21 percent GMP. They would spend 1.5 percent of sales on advertising. A well run furniture store should average a 42 percent GMP. They would spend 5.2 percent of sales on advertising. A fortunate jewelry store or gift shop may run a 50 percent GMP. They could afford to spend 7 percent of sales on advertising. If a furniture store has sales forecasted of $500,000 in the month of April, it should plan to spend $26,000 on advertising in April. If sales were forecasted to drop $250,000 in May it would plan to sepnd $13,000 as long as the margin of profit is maintained.

Baragrey is a business consultant and sales trainer for Publishers-Edge. He can be reached at dbaragrey@Publishers-Edge.com.

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1.4%

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2.2%

2.5%

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5.8%

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6.2%

6.4%

6.7%

7%

Ad Spending Decline is Slowing

Retail advertising in the first quarter slipped 0.8 percent to $4.6 billion, national advertising was down 3.5 percent to $1.7 billion and classified advertising declined 13.6 percent to $3.5 billion.

"The ad community is slowly regaining its footing as the economy continues to show gradual improvement," said NAA President and CEO John F. Sturm.

Within the classified category in the first quarter, automotive rose 4.7 percent to $1.1 billion. Real estate continued to increase, gaining 2.8 percent to $766 million. All other classified ads were up 6.6 percent to $546 million. Recruitment advertising dropped 38.4 percent to $1.0 billion.