It’s a question we hear often: “I know advertising is important. In the past, I relied on local media (newspapers, radio, TV) and word of mouth. Today, I’m reading studies that show 9 out of 10 auto shoppers use the Internet to research new purchases before they walk onto my lot. How much should I be investing in advertising every month given this shift?”
The fact is that there’s no set-in-stone formula when it comes to establishing your advertising budget. However, asking the right questions – and keeping your sales goals at the forefront of the discussion – can help you realize the most powerful outcomes.
That said, there are two ways to approach this question to arrive at a monthly investment that will generate a strong return on investment (ROI).
The first is that most marketing textbooks tell you to set aside 15 to 20 percent of gross sales for your advertising activities for any business generating $5 million in gross sales or less.
However, as Roy Williams writes in Entrepreneur magazine, It isn’t possible to designate a percentage of gross sales for advertising without taking into consideration the markup on your average sale and your rent/overhead expenses.
Williams offers his more realistic three step process to calculate your minimum and maximum allowable ad budget. This formula reconciles your ad budget with your rent or employee costs as well as the profitability of your average sale.
Step 1: Gross Sales & Markup
Take 10 percent and 12 percent of your projected annual, gross sales and multiply each by the markup made on your average transaction. As a general business rule you’ll need to adapt to your dealership, assume that my business is projected to do $1 million in gross sales this year, I have a profit margin of 48 percent, and my rent is $36,000 per year. The first thing to do is calculate 10 percent of sales and 12 percent of sales ($100,000 and $120,000, respectively).
Step 2: Adjustments
Next, deduct your annual cost of occupancy (rent) [or employee costs (whichever is higher)] from the adjusted 10 percent of sales number and the adjusted 12 percent number.
Using the example in step 1, we must convert my 48 percent profit margin into markup, because markup is what we’ve got to have to make this formula work. Most business owners know their margin by heart, but never their markup. To make the conversion from margin to markup, simply divide gross profits by cost. Dividing $480,000 (gross profits) by $520,000 (hard cost) shows us that a 48 percent margin represents a markup of 92.3 percent.
Step 3: Get Minimum & Maximum Budget
The remaining balances represent your minimum and maximum allowable ad budgets for the year. Now we multiply $100,000 times 92.3 percent to see that our adjusted low budget for total cost of exposure is $92,300. Likewise, we multiply $120,000 times 92.3 percent to get an adjusted high budget for total cost of exposure of $110,760. From each of these two budgets, we must now deduct our $36,000 rent.
For our $1 million business, this leaves us with a correctly calculated yearly ad budget that ranges from $56,300 on the low side to a maximum of $74,760 on the high side.
More realistically for a $1 million business, if rent or employee expenses were $75,000 per year, the ad budget would range from $17,300 to $35,760, representing 1.7 to 3.5 percent of sales.
Where to Invest Your Monthly Budget
With a monthly investment number in mind, the next question is where to invest your dollars for maximum ROI.
If your goal is to lead your market, a higher investment will be necessary to achieve success. Many businesses start with a more modest investment to participate in their market, and grow their spending based on advertising and sales success.
Across the industries we serve at Netsertive, our most successful local business clients are allocating 40% to 50% of their monthly budget to Internet-related spending, with the rest spread among traditional marketing channels like newspapers (15%), radio (10%), TV (20%), and direct mail (10%).
For automotive dealers, recent NADA data shows that the average new car franchise dealer spends $8,000 to $10,000 per month online.
In hyper-competitive metro markets, assertive GMs invest $20,000 – $40,000 online.
You’ll need to adjust your projected spending up or down based on the size of your market, the cost of media, what you can learn about how much your competitors are spending, and the speed at which you’d like to source new buyers. The key today is to be assertive online, take the lead in your market, and invest at a strong level to be the dominant dealer for your brand.