In the global marketplace and at a time of growing reliance on online communication, advertising is a crucial component of most companies’ normal operations. Companies can produce a quality good or provide exceptional service but sales for that company will struggle without proper advertising.
Advertising must be done efficiently and effectively for companies to maximize their investment in an advertising campaign and sufficiently drive sales for a good or service.
If advertising is not done properly, such as ad misplacement or marketing to the wrong target audience, thousands of dollars can be wasted in an ill-advised marketing campaign.
How Much Should a Business Spend on Advertising?
While new companies should spend 12 to 20% of gross revenue on advertising, established business should spend 6 to 12% of gross revenue on advertising. An advising budget of 7 to 8% is recommended by the US small business administration for companies that are making less tha 5 million a year.
Large businesses have no set guidelines for advertising spending. Advertising expenditures for large businesses vary based on industry.
There are other approaches to determining how much to spend on advertising, including research on competitors in your industry, an objective or task-based approach, and the maximum amount feasible approach.
Average Advertising Budget For Small Businesses
Small businesses often follow the common rule of thumb of determining how much to spend on advertising based on how much revenue the small business generates. According to the U.S. Small Business Administration, 7 to 8% of gross revenue should be spent on marketing and advertising for companies generating less than $5 million per year in sales.
This guidance varies for new and established companies. Whereas established companies already have brand recognition, newer companies need to quickly grow their advertising presence to begin generating sales for their good or service.
Although actual marketing and advertising spending for small businesses sometimes stray from this guidance, this rule applies to most advertising budgets. Ultimately, no more than 20% of gross revenue should be spent on advertising – unless in extreme circumstances.
Average rounded investment in websites and other forms of online marketing in Canada shows what following this rule looks like:
|Average Annual Spending||Less than $2 million||Between $2 to $10 million||$10 million or more|
Average Advertising Budget For Large Businesses
Unlike small businesses, large businesses have substantially increased their marketing budgets over the past 5 years. With the intense competition over the same target audiences as other companies, advertising has become a vital tool to increasing market share in a sometimes a highly-saturated market.
Large businesses follow no set guidance for advertising spending, as marketing requirements differ greatly for large businesses based on the type of good or service provided, the industry the company is in, what competitors a company has, and the geographic location of the country.
An example of the expenditures for top spenders on advertising comes from the 2019 Ad Age Leading National Advertisers report. According to this report, the top 10 large businesses purchasing advertising spent the following:
- Comcast Corp: $6.12 billion
- AT&T: $5.36 billion
- Amazon: $4.47 billion
- Procter & Gamble: $4.3 billion
- General Motors: $3.14 billion
- Walt Disney Co: $3.13 billion
- Charter Communications: $3.04 billion
- Alphabet (Google): $2.96 billion
- American Express Co: $2.8 billion
- Verizon Communications: $2.68 billion
Approaches to Advertising Budgeting
For small businesses or startups trying to determine how much to spend on advertising or marketing, there are different approaches than the 7 to 8% of gross revenue rule recommended by the U.S. SBA. Alternative approaches include comparison research, objective-based approaches, or the maximum amount feasible approach.
Comparison Research Approch
As recommended by the National Federation of Independent Business, a different approach to advertising spending can be competitive comparison research. Since each industry spends differently on advertising, research what other companies in your industry are spending.
For example, while the Entertainment industry spent $8.5 billion in advertising for 2020, the Automotive industry spent $13.3 billion. Find what particular companies in these industries spend and calculate your own budget accordingly.
Object Based Approch
Another method is to research the amount of advertising budget needed for each objective or task. For example, advertising costs for purchasing pay-per-click (PPC) ads will differ from advertising costs for publishing blog posts on a website.
Compare costs based on the type of advertising tasks to be performed and build a budget that would allow your business to reasonably conduct certain forms of advertising.
Maximum Amount Approch
A final method of building an advertising budget is based on the maximum amount approach. For the fastest growth, any funds leftover from covering all expenses should be invested in advertising campaigns. Although this method will lead to the highest advertising expenditures, a small business can grow its presence much faster than other advertising routes.
What is the Average Spending on Advertising for Most Companies?
Business-to-business firms invest between 2 and 5% of their sales revenue on advertising on average. Advertising accounts for 5 to 10% of revenue for businesses that sell to consumers. The overall advertising spending in North America for 2020 was nearly $250 billion.
If you decide your company needs to spend on advertising, there are several different advertising routes to take:
- Place advertisements on keyword searches
- Utilize targeting parameters to reach certain target audiences
- Purchase paid social media advertising
- Routinely publish SEO blog posts or articles
For more information on advertising options for small businesses, refer to 7 Advertising Strategies provided by FreshBooks.
Benjamin is a certified financial advisor, with over 10 years of experience in the industry. He is knowledgeable about various business and financial topics, such as retirement planning and investment management. Ben has been recognized for his work in the financial planning industry. He has also been featured in various publications.