How Much Do Companies Pay In Advertising?
Many people want to know how much money a typical company spends in advertising. That is the $64,000 question. The truthful answer is it all depends on many factors including what industry your company is in.
Many business schools conduct studies to try to tackle this ‘advertising expense’ question. And most of the research you’ll find states that that most companies devise their advertising costs based on a percentage of their gross revenues.
The consensus among the people that ‘study this stuff for living’ is that companies typically spend somewhere between 5 – 10 % of their gross revenues on advertising. For instance, an article on the U.S. Small Business Administration website recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales. http://www.sba.gov/blogs/how-set-marketing-budget-fits-your-business-goals-and-provides-high-return-investment
This whole ‘advertising to gross revenues ratio topic’ is a big deal for many companies. But the big deal is that they actually like to do a lot of covert analysis and figure out what the competition is paying.
There are many well-known factors that determine how much different companies spend on advertising.
Big Companies
Here’s something that may surprise you: the larger the company, the lower advertising to gross revenues ratio will be.
The good thing about public companies is that you can find out exactly what they’re spending in advertising by looking at their annual report. And if you take a look at the annual report of a very big advertiser like Coca-Cola, you’ll find the company spent a total of $3Billion in advertising in 2013. That number is a huge amount, but it only equates to 6.4% of their gross revenues ($47 Billion). FYI – AT&T only spent 2.3% and Ford spent 3%.
Luxury Companies
Another factor that may be obvious to you is that companies with higher margins traditionally have a much higher advertising to gross revenues ratio. Bargain shoppers work hard to find the best bargains, so if you’re a business that has the cheapest prices – they’ll find you. Luxury shoppers on the other hand need to be convinced of how luxurious your products are. So an upscale store might spend double the ‘advertising to gross revenues ratio’ of what a discount store pays.
Without getting into the ‘Big Companies’ aspect that we mentioned above (ex. Macys/Bloomingdales 8.6% and L’Oréal 8.1% are huge luxury corporations), a high-end family-owned local jewelry store might have an ‘ad to rev ratio’ of 15-20%.
Professional Services
The professional services industry is another area that tends to spend a considerable amount of money on advertising. Many of the companies in this industry do not have a large storefront/footprint in a high-traffic area like a shopping center, because of this they need to spend more in advertising to let people know they exist. Besides marketing and advertising, the people in this industry also do a lot of outbound sales like sales calls, networking, and appointments to drum-up business. Some companies in the professional services industry may spend up to 10-20% on their ‘ad to rev ratio’.
New/Upstart/Emerging Companies
New companies have a huge desire to make a big splash in their initial years to get the word out to the world about who they are and what they do. This aspect is doubly compounded if the company has some new revolutionary product that they need to get out into the market very quickly.
Because of these factors, new companies are notorious for spending a lot on advertising; in fact, much of their startup capital may be allocated for immediate advertising and marketing expenditures. But here’s the kicker, because of the fact that these new companies may not be making much in revenues (and they possibly may not even be profitable yet) their ‘advertising to revenues ratio’ may be astronomically high!
So What’s the Deal?
The ‘business school moral to this story’ is that advertising budgets for all companies are truly unique. Many factors go into deciding what your company should spend. How much is in your budget, what are you comfortable with, and what gives you the best results, are all factors that you need to digest and analyze in order to find out what works best for you.
