Calculating Your Ad Budget

One of the best pieces I've ever read about calculating an ad budget was passed on to me in early 2003. Rather than using the old 5-6% of sales measure for creating my ad budget, I've used the following formula and it's been terrific!

First, before starting (and I know this is business 101 for most of you but please bear with me.

MARGIN is Gross profit divided by Gross Sales Volume

MARKUP is Gross Profit divided by Cost of Goods

Be sure to plug in MARKUP, not MARGIN when figuring your ad budget. Let's say that you have a business averaging 100% markup (keystone) or in other words a 50% Gross Profit Margin.

Take that and multiply the average markup by your cost of exposure...for most businesses the cost of exposure is = to a percentage of your projected sales. I use 10%.

So, if my projected sales are $300,000 per quarter the ad budget calculation looks like this:

30,000 x 100% = $30,000

Now, take that $30,000 number and subtract out your cost of exposure..your website, storefront, rent, etc. for the quarter. Let's say that's $7,500.00

$30,000 - $7,500 = $22,500 and there's your ad budget for the quarter.

if, however, my average markup is only 86% it would shake out as follows:

30,000 x 86% = $25,800

$25,800 - $7,500 = $18,300 remaining for ad budget.

It's a simple formula and while not every simple formula such as this is going to fit every business you can modify it so that it can provide a "make sense" number for you in these otherwise very confusing times...and if nothing else, you have a firm number in mind when shopping for the various marketing/advertising options out there that you can choose from. I do hope that this helps...it's what I use and it hasn't failed me yet!

Best Always,
Dave J.