Out of the Crisis.Org

[Louis Altazan]

I think a lot of businesses wonder what is the proper amount to spend on advertising. I never heard Dr. Deming address this point specifically and I don’t know if there is an amount or percentage that is “the one right answer.” If I were able to ask Dr. Deming I feel he might suggest, “The amount necessary to produce the desired result.” This would be in keeping with his tendency to not tell managers how to manage, instead giving them the theories by which to figure it out for themselves.

So what might the “right amount” be, that will produce the desired result? As in most things, it depends on the result desired. In a gross oversimplification, advertising can be geared toward quick-results or long-term awareness.¹ If quick results are the aim, advertising may be seen as an expense. Run a promotion, get so many results. If the additional sales resulted in net profit far exceeding cost, the expense was well spent.

In such an arrangement the cost of the advertisement might be calculated and the sales likely to result estimated. From there, knowing average net profit, it can be theorized if the expense is likely to produce the desired results. With a bit of reverse-calculation a budget could easily be determined. A shop in need of additional work might use such an approach.

Additional immediate sales is not the only reason a business might advertise. A business more interested in long-term growth may take another approach. For instance, if they see themselves at point A and wish to be at point D. To such a company advertisement may be viewed as an investment. The message they use would not be geared toward quick returns. Rather it is geared toward consistency and putting the message in the minds of potential and current clients. I must also be realized this is a long-term effort.

With this approach, running a few ads, no matter how well done, is likely to have little effect. Rather a budget is established realizing this is a long-term investment. Such a company may decide on a percentage of sales to invest in advertising. The success might only be measured against a long-term aim. For instance the amount necessary to maintain a specific backlog of work.

Even with promotional advertising, I feel such an aim is a good measure of success. I feel tracking the amount spent to maintain a desired backlog [or at least capacity sales per day] would be very useful. Since repeat and referral clients cost very little, they lower the cost. I believe they also infer client satisfaction, so they are a good indication of meeting that aim.

Repeatedly coming in under budget would indicate greater client satisfaction or perhaps the budget was excessive. Rather than initially reducing the budget, surplus could be retained in a reserve account. Once statistical methods indicate the surplus to be consistent the amount might be reduced. It might also be maintained as a reserve for future growth, or to venture into new markets.



¹In my experience, advertisers will most often recommend methods geared to short-term results. Clearly, this makes it considerably easier to justify the expense. A manager must decide which method is in keeping with the company aim and needs at the time.

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Louis Altazan
Owner/Manager AGCO Automotive Corporation
Baton Rouge, LA

[Bud]

Funny you would be thinking about this topic. I've a post in the works about the foolishness of one-time ads. It then goes into the number of times people need to see an ad before they even respond to it.