How fo Decide How Much fo lnvest in Advertising

$7 in a series prepored by Arthur A. Hood, for Iohn H. Ryd,er

1|lF ALL management decisions, deter- nrininq the size of annual advertisinq appropriation is one of the most puzzling'.

Advertising is both a science and an arto but the science is not yet exact-the art is yet to be perfected.

There are so many intangibles in the picture that both the rvisdom of a Solomon and a "little bit of luck" are needed for the best results.

Of one thing vou can be certain, that vour sales volume, and, to an even more important extent, your net profits, will be related to what you invest in advertising and the manner in which you invest it.

Before getting into the problem of specific approaches to the setting up of the budget, consider these points:

Advertising is an investmsnf-ns mush so as the money devoted to plant, facilities, inventory, equipment and payroll' It is a paradox that to project the results of a proposed investment in advertising it is both vitally important and almost impossible to accomplish exactly. Often unforr:seeable circumstances both favorable and unfavorable afiect the results. The fact that American business is investing 12 billions of dollars a year and increasing it at the rate of a billion dollars annuallv is reassuring here.

Competition for the consumer's dollar is increasing each year. This calls for more advertising.

The current changes in the industry such as the trend to consumer selling, increased component and package selling, new product developments, the stepped-up competition of cash and carry operators and discount houses, and increased by-passing of the dealers on the part of wholesalers and manufacturers-all indicate larger investment hy dealers in advertising which will control the buying traffic. The more you invest, the more you lvill increase sales-up to the point of diminishing returns!

Advertising must always be related to desired sales volume. It should be consistent with sales expectancy. According to the National Cash Register Co. advertising accounts for about 60/o ol all retail sales.

Your advertising investment must be sufficient to- (1) divert your share of locally developing busine.ss to your establishment and (2) create in the minds of local people the desire to spend more of their disposable income for building products to be bought at your store.

The future of your business depends on the velocity, impetus and momentum of vour sales. Increased advertising will put this VIM into your sales. If there is a growth potential in your company, increased advertising is the way to get it startecl.

Advertising, by its very nature, must be done considerably in advance of results.

There is often an extensive time lag between the stimulation of advertising and the customer's purchase. The efiect of advertising is cumulative.

If you have been investing less than the industry average (now l/o of sales) or if you are switching more emphasis to con. sumer sales. increases should be made in your appropriation.

Where the growth of vour company's sales volume and profits have been either unsatisfactory or not in proportion to your opportunities, more dollars for advertising are indicated.

After you have decided that more and better advertising is a must for you the next questions are, How Much lVlore? Hoir many total dollars?

You may now be ready to consider:

Some approaches which may assist you in arriving at a sound annual budget fot advertising:

l. The Noiionql Avercae

National Cash Register Co.-who ought to know-says that the average for all tvpes of retailers in the U.S.A. is 3Jb oI total sales volume. While building prgdgcfe:!, retailers have never averaged this-their ' business is becoming more like the heavier advertised types of retailing every day. f)epartment store appropriations customarily range from 27/-t to 4/o of sales.

2. Previous Compony Experience

What were the most successful advertis' ing results the cornpany has ever had in (non-boom) normal years? It is probable that the needed growth would require a higher percentage of sales for advertising than the company has ever invested in the past. Your appropriation would probably be in the range of I to 2% of sales with this approach.

3. A Percentoge of Next Yesr's Sqles Quotq

This is similar to approach $l except that you use your judgment rather than taking a national average. This figure should take into consideration the increased costs of all kinds of advertising as well as the company's projected growth in sales volume. You may arrive at I to 3% of. sales as an appropriation with this approach.

4. The frends in the IndustrY Investments in advertising in the retail Iumber brrsiness have risen sharply in re' cent years. As little as B years ago the national average in the field was t/z of L/o. The latest hgures indicate the average is now in excess of 1/o. Any dealer who wishes to be above-average in sales efficien. cy will have to use I/o as a starting point and then increase this l/o in proportion

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' to his desire for betterment. You may arrive at ly4 to 2/o oL sales as an aP- propriation with this approach.

5.

The Tosks ond Obiective Approcch

How many people do you want to reach? When? Where? How much larger a job have you laid out for advertising to accomplish next year than before? The percientage of appropriation to sales should be increased proportionately. Your appropriation might be upwards lrom 2/o oL sales with this approach.

6. The Follow-the-Leqder Approoch

What kind of investments are made an' nually in advertising by the leaders of the industry that you respect? What dealers do the best job vou know of-for their community and their snckholilers? How much do they put into advertising? A riational survey of such dealers averaged between 2 and 3/o of sales. Another name for this is the Success'Oriented ApproachYour appropriation under this method would be in the neighborhood ol 2r/z% of sales.

7. Whor Competilors Are Doing

This is a favorite approach of manl' dealers because (l) it is simple and (2) it follows human nature. But it is probablv the poorest of all approaches because you are holding yourself down to the conrpetitors' merchandising level.

It is unwise to use retaliatory measures because this promotes reprisals and un' economic practices with industry. It is better to analyze where competition is weak in advertising and hit this hard.

8. The leod-rhe-Field Approoch

Under this you decide to invest more itt advertising than anyone else in the competitive field. With this approach you de' termine not only to get more volume, but to capitalize on the other fellow's opportunity and get the largest share oI the local volume. It might be well to push back the frontiers of your trading area and solicit business from a larger population under this method. In most markets, your appropriation would exceed 2t/n/o oI sales with this approach.

9. The ftlorkefing-Mix Approoch

This is probably the most scientific of all approaches to your advertising budget. Under this method you project your next year's sales quota in the following categories: l. Highly competitive contractor and industrial sales.

2. Controlled contractor and industrial sales.

3. Over-the'counter and consumer merchandise sales.

4. Consumer package sales, materials only.

5. Consumer and contractorpackageand component sales (including labor). You will probably not need more than 7/z oL L/o of sales for categories 1 and 2; 2/o ol sales for the volume you prepare to do in category 3, and 3t/n/o oL sales in categories 4 and 5. (A few successful dealers go as high as 5/o in this category.)

Other less customary approaches include : tO. The Deportmeniol Approoch

Some dealers divide their sales quotas by departments such as lumber and millworlg paint, hardware, hard materials, etc. and determine a percentage of sales lor advertising which is in proportion to the return on the investment from the difierent depafiments. Some dealers go as high as 4/o on hardware and 5/o on paint.

I t. The Unit-of-Sole ApProoch

A few dealers follow the Pattern of operative builders and home improvement companies, and include in their package sales prices a certain sum for advertising i.e., np to $100.00 per house for projected new home sales, up to $75.00 each for complete kitchens, etc.

12.

The "All you csn Aftord" Approoch

Under this method a dealer arbitrarily fixes a sum in his mind and says, "That's all lve can put into advertising next year." Obviously this is the least scientific of all approaches. When it is used, a dealer, in nine cases out of ten, will come up with an inadequate appropriation and his sales will suffer. Some of the danger in this method will be obviated rvith the establishment of a mininrum of I/o. Perhaps we should keep in mind here Lincoln's commentooA man's legs should be long enough to reach the ground."

13.

The Breok-even Point Approoch

When a dealer's sales for a period have reached the break-even point, increased advertising which will create additional consumer volume out and beyond normal business expectations, will make beyond the ordinary contributions to net profits.

14.

The Diminishing-Curve Approcch

This approach is often used by dealers who are establishing new yards, adding new departments or introducing nerry lines of products.

Under this method, a dealer will budget as much as 5% of sales for advertising against the first six months' quota, 4/o the second six months and then level out at 3/o.

| 5. An Amount Equol lo Proiected illonogement Solories ond Bonui.r

I know of only one dealer who uses this method and" he swears by it. When you consider that advertising byits verynature, saves human efrort. it does make sense. Undoubtedly, this is better than the o'AIl you can afiord" approach. It is probable under this method that advertising will prove to be your least costly, and most productive, o'employee,"

Perhaps the "thinking dealer" will use several of these approaches and then average out his frndings when it comes to the final decision.

One caution should always be used: Neuer appropri.ate more than enough to heep your proposed sales organization perlorming at top speed,. Stating this another way-always make certain that you haoe enough sa)es manpou)er to lollow eaery qualified lead,. O therwise aihtertising money is wasted,. Conversely-you should always do enough advertising so that your sales forces are never idle for lack of leads. Cood advertising doesn't take the place of personal selling but it doubles the efieetivo. ness and triples the net pro6t in penonal selling when it is coordinated for peak efficiency.

Another vital profit safeguard is to take another look at your pricing structure if vou increase advertising investments.

While advertising appropriations are an i11yss[msnt-they should be compensated for in the pricing structure like any other costs.

Here are some miscellaneous consider. ations in fianally arriving at your advertising appropriation:

Age ol your business-Young companies should ordinarily invest a higher percentage of sales in advertising than older, wellestablished companies.

Profit experience--II your company has been one of the top bracket profit perfornrers i.e., 2O/o more net profits on the investment before taxes, go slow in making changes in your advertising. "Just keep on doin' what you're doin'."

Winillalls and, extraord,inary profitsWhen good fortune strikes,it is goodpolicy to take a part of the money and put it into advertising which will tend to increase such happenings in the future.

In boom times-lncrease rather than decrease your advertising up to the point where you can't follow the lead. There is always a lag in the efiects of advertising: This is good insurance against the lean days which will surely come again.

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