Do You Spend 10% of Your Revenue on Advertising?

By Case Harris | Oct 13, 2011

Advertising as a percentage of gross revenue will be different for every industry, every market and every individual business.

For instance, a restaurant might be widely known and well marketed based on the talent and reputation of its chef. Or, a bar may have a manager who is a talented “personality” who brings in customers and keeps them there – that manager’s bonuses typically will be classified as payroll for tax and legal purposes; however, for budgeting purposes, they should definitely be categorized as a part of marketing and promotion.

Conventional wisdom tells us that well thought-out signage is a big part of a store’s promotion. However, to me, that is more of a “startup” or build-out expense rather than an ongoing marketing expense. And since we’re discussing monthly expense as a percentage of revenue, I’ll save the concepts of signage and building exposure for another discussion.

In general terms, it’s common for a business to spend 5 percent to 10 percent of its revenue as a marketing and promotional budget. But this is a rather misleading idea. Let me illustrate with a pair of examples:

Some businesses will opt to spend upwards of $500 per month on a Yellow Pages ad. If their monthly gross is $5,000, there's the 10 percent right there. However, Yellow Pages ads are an extremely passive form of advertising, so there's no additional real or man-hour expense associated. They layout the graphic design for the ad, and it runs in a publication that isn’t new every week, month or even quarter. It’s there, and you’re spending money to advertise in that medium, but you don’t actually have to do anything beyond the initial copy approval and, of course, paying the bill.

Another business might spend zero dollars per month, claiming that all of its advertising is done with “in-house” signage, hand-delivered coupons, Google Places, a free website and word of mouth. This laundry owner isn't accounting for the real expenses associated with his or her chosen form of advertising – the time to imagine, layout, print, proof, final print and post the signs and flyers is worth money. The paper that the coupons are printed on costs money. The time to hand out said coupons has to be factored in, as does the time taken to create and update the Google and website information.

Chances are, if you're using “word of mouth” advertising, you've helped generate that good word of mouth by interacting with your customers and being on-site a good bit of time – that time is money, and that money has a value that must be calculated and planned for in your budgeting process.

If I sat down and honestly calculated the time I put into Twitter, Foursquare, Facebook, Google, Yelp, graphic design and copywriting for my website – and then assigned that time a value of $100 per hour – it would add up to something close to 5 percent of my monthly gross revenue. Add to that the real money expense I put into radio and print advertising, as well as the expense of Internet service and website hosting, and I would be shocked if the real cost of my marketing and promotion didn't slightly exceed 10 percent of gross revenue.

The real “bottom line” is to be sure to factor in time and other resources used in guerilla marketing. Time is money, and money is money. If you can always account for your time invested in advertising and think of it in terms of dollars, it will have a positive impact on your bottom line.