One of the great questions of business management involves how much revenue should be expected from a given dollar amount spent on advertising. If your company is volume-driven, like Wal-Mart, your percentage spent on advertising will be smaller than if your company is margin-driven, like a liquor company. Wal-Mart spends approximately 1 percent of its revenue on marketing and advertising, but the liquor industry companies generally spend 5.5 to 7.5 percent.
Marketing versus Advertising
Marketing and advertising, though often spoken of interchangeably, are not the same thing. Marketing refers to strategic planning, presenting and selling a product or service. Advertising is the promotion of that product or service, according to the guidelines and needs of marketing. In accounting, marketing and advertising are often considered a cost of goods sold, while marketing is also sometimes considered an operational expense. How you account for these expenses depends on how they relate to the production of revenues, but it is important when you are trying to decide how much to spend on advertising.
When a company offers a discount on sales, it is taken out of revenue and produces net revenue. Cost of goods sold, or COGS, comes out of net revenue and produces the gross margin, which is the money a company uses for operations and administration. Advertising that directly affects the production of revenues, such as newspaper ads announcing sales or radio and television ads announcing special promotion days, are a cost of sales.
Return on Investment
Advertising is an investment and, like any other investment, it is expected to produce a profitable return. Research similar companies in your industry to determine what percentage of revenue they spend on advertising. Automobile companies generally spend 2 to 5 percent, and packaged goods companies spend approximately 4 to 10 percent. The smaller or newer your company, the greater the percentage spent on marketing and advertising, ranging to 20 or 25 percent of revenues. In planning a startup, a rule of thumb holds that $4 in revenues should be received for every $1 spent on marketing and advertising.
Every industry and startup company is different when it comes to how much must be spent on marketing to achieve acceptable revenues. When a new brand or product is entering the marketplace, it is necessary to spend more money on promotion. Your initial return on investment may not be as attractive as it will be later, when the brand or product is already acknowledged in the marketplace. An established subject of your advertising will require a smaller percentage of net revenues to achieve a target return.
by Victoria Duff, Demand Media