Know-How Exchange : Strategy

Sorry to disappoint you, but there are no easy answers to you question, let alone the right one.
It depends on so many factors, first off on how much you want and can devote to it.
Do you know how much your competitors spend on advertising? It could serve as some benchmark.
Also the product life cycle is important you spend more when you launch.
Another thing important is how you spend the money and what you know about how effective it is in producing results for your company.

Take a financial view - advertising is an investment, not a cost. You need to make a return on it in the same way you would want to make a return on employing a sales person or buying a new cutting machine.

Say you spend $10,000 on advertising and it generates $100,000 of sales with $20,000 profit on the bottom line. If there were no diminishing returns and no limit to your business's production capacity wouldn't you want to spend $10m if you knew you could this would generate $20m profit? or $100m to get $200m of profit? The amount you spend should reflect the reward you want to achieve.

Now of course it's not this simple. There will be diminishing returns and capacity issues and like all investments there is a risk-side too - the investment may not make the returns you expect. That's why you need to test, refine and monitor before making the investment. Try small and low cost to prove the advertising impact, particularly with direct marketing approaches. Then scale up when you have tuned the campaign, but watch for the diminishing return issue. With direct marketing you can turn it off when you start to reach capacity limits.

With mass-market advertising (TV, press, radio, poster), it's less easy to tune quite so scientifically as there is an additional cumulative effect in terms of awareness and brand recognition which may not be noticed immediately, but you can still run test and control type experiments before making big commitments. The problem is usually starting, as you have to guess with relatively large sums. Once things are running, tweaking and testing are a lot easier as you have benchmarks.

So to proceed, relate the cost of advertising as a per unit cost - what quantity of $ advertising generates what $ of sales and $ of profits (my guess is you don't have this hand at the moment). Then look at your sales targets and capacity limits. This should tell you what you need to spend. For instance in FMCG industries advertising spend can be up to 12-15% of sales revenue.

Build in some slack for potential underperformance, then work as hard as you can to maximise the marketing return with wise advertising investment (test test test) - ever $ less you need to spend for the same return is a $ more on the bottom line.


Saul