During an economic slow down most businesses take time out to think about their cash flow and their spending budgets, or so they should.
I know from talking to other businesses that things are tough out there right now, and you only have to look down your own high street to see the all revealing closing down sales and empty shops of businesses, including some large retail chains, to know that things are very difficult.
However, this is not a time to hold back on your advertising though and for one of my businesses we, as a board of directors, have recently decided to up our advertising spend. In this case the business concerned is in the care-sector and we chose to up our marketing budget to 7% of our turnover, so that as turnover begins to increase so will the amount we spend on marketing and advertising and so on.
I know that newspapers and magazines are having a tough time too right now because businesses are not spending the same on advertising as they did 12-18 months ago, when in fact the opposite should be true! At a time when competition is high and customers are being selective about where they spend their money, you need to keep you business in the “Eye” of your customer and even more so when things are tough.
I noticed that when I looked at search terms on this subject there are some top searches not least some looking to see what other businesses spend, for example: “how much does mcdonalds spend on advertising”; “how much money do advertisers spend on advertising”; “how much do companies spend on advertising”; “how much bose spends on advertising”; “how much do business spend on advertising a year”; “how much sears spends on advertising”, were some of the top ones. What I don’t know is whether people are actioning after doing their research. If you were the one looking at how much McDonalds spends and you happen to be in a similar trade, then you should consider spending a similar amount as they do in order to keep up.
It would be easy for you to do some of your own research on what amounts other businesses are spending on advertising or companies within certain sectors, to give you an idea of what you should be spending too. I would suggest that the amount you spend be no less than 5% of turnover and possibly up to around 20%. However, one thing you need to take into consideration is your “gross profit margin” you make.
If in your industry your gross margin is let’s say 20% – there would be no point in spending 20% on advertising, as this would take up your whole gross profit and you might as well close up shop now. However, if your gross profit margin was say 60-70%, which is what the margins are like in the food trade, then you might wish to consider spending up to these levels of advertising, as you have a large amount of gross profit margin to play with.
In the example of the care business sector mentioned above, the gross margin in this particular business is 32%, so 7% of turnover will leave us with a net of 25% gross profit to go towards the other business overheads and profit for the shareholders.
For those that are not quite sure about what “Gross profit margin” is – it is the percentage you make on your sales over an above what it costs you to make those sales. So for example, if you sell televisions and you sell one for let’s say £500 and it cost you £350 to buy the television, then you gross profit in this instance is £150 or 30% (£150 divided by £500).
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A very informative article and very useful.
I have a small company and i spend 20% of my sale just for advertising. and i also see those problem you said. but is there any way to avoid them?
Hi Tim – thank you for that piece of information good comment – have you thought of joining my business forum at http://in-business.org.uk/forum/
Great post. Ogilvy did a study about advertising and marketing spending during recessions and the results are astonishing. Brand deterioration took place very quickly on those businesses that closed the purse so to speak. This is especially concerning for small business owners who don’t have this type of research. It’s counterintuitive to them to spend in a slow economy.
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Hi Joe – invariably in a down-turn companies cut back on marketing so this makes sense that shares in marketing firms would fall. Whereas the opposite should be true, comanies should be increasing their spend to make sure they survive the turn-down in trading or at least keep the level the same as before the credit crunch started. Businesses should look at other costs and reduce these in favour of maintaining advertising and marketing to keep this in place or increase spend. The other thing to highlight is that businesses must monitor their advertising spend to make sure they are getting a return on the “investment” and businesses should look at this spend as an investment too.
Hi Greg – thank you for that feedback, what business is that you are in where you spend 10% on marketing?
My company spends about 10% on marketing, as our industry has high turnover. (which is always a factor)
it’s all depand on how much you gain on your product add . it’s useful when you spread your add and product on targeted market.
i heard that the falling of stock market prices for marketing firms is a good predictor of a coming downturn, but i havent seen any evidence for this current economic cycle. have you found any and could you comment?