What Are Advertising Costs?
Advertising spending can be broken down into a variety of subcategories, the most common of which is “advertising costs,” which includes everything from traditional media to newer channels.
Campaigns to increase brand awareness and brand building, as well as highly targeted campaigns aimed at appealing to existing customers, are just two examples of the benefits of advertising at different points in the customer journey.
Understanding Advertising Costs
Advertising costs are typically classified as sales, general, and administrative expenses on a company’s income statement (SG&A). These costs are sometimes recorded on the balance sheet as a prepaid expense and then transferred to the income statement when sales directly related to those costs are generated.
Before an organization can record specific advertising expenses as assets, it must believe that those expenses are linked to future sales. As sales are made, these advertising expenses are transferred from the balance sheet (prepaid expenses) to the income statement (SG&A).
Advertising costs are usually not a surprise to a business owner. Advertising expenses are frequently budgeted for by many businesses. According to the Small Business Administration, most businesses base their marketing budgets on revenue.
Advertising accounts for only 1% of the average small business owner’s revenue. Advertising spending for manufacturers and wholesalers will be closer to 0.7% of annual revenue in 2020.
There is no guarantee that simply spending money on advertising will result in a return on investment. As a result, business owners must spend their advertising budgets in areas where the audience is likely to include potential customers. Depending on the media outlet, some offer a 40%-50% discount for advertising in slots left open due to cancellations.
Regardless of how much money a company spends on advertising, it must maximize its return on investment. Advertising opportunities abound, making it difficult to choose from them all. Your best bet is to design a program around business objectives.
Example of Advertising Costs
If a company knows that a direct mail campaign will result in future sales, it will record the cost of the campaign on its balance sheet as an asset, a prepaid expense. As the campaign progresses, direct mail expenses will be transferred from the prepaid expense category to the advertising expense category.
To show the impact of those advertising expenses on sales, the company must be able to show direct links between them. This can be accomplished by utilizing historical data. It could mean that if a company knows it received 100,000 responses when it sent out 1 million pieces of direct mail in the past, it could apply that ratio to future direct mail sales.
Why Do Companies Spend Money on Advertising?
Companies spend enormous amounts of money on advertising because they want to get the word out about their offerings, whether it’s a sale or a new product. Advertisements for companies such as HDFC Bank, TATA Motors, Airtel, etc., designed to increase brand recognition, often appear in print and broadcast media, on billboards and other outdoor advertising media, and even through BULK SMS, to ensure that their products and services are remembered by consumers.
With the advent of the Internet, social media, and e-commerce, modern marketing has become more attractive to consumers than ever before. Newspapers, magazines, and television advertising, while among the oldest, are still among the most effective forms of advertising.
In recent years, however, online marketing has emerged as a real alternative, with a marketing strategy all its own, making the availability of products and services as easy as clicking a button.
How Much Should a Company Spend on Advertising?
Simply put, your marketing spend should equal a fixed percentage of your total revenue. As a general rule, businesses that sell to other businesses should spend 2-5% of their revenue on advertising.
For businesses that target consumers, the percentage is usually between 5% and 10%. This is because B2C companies usually have to spend more money and resources on advertising to reach all their potential customers.
Researching what is typical for your industry and what your competitors are spending is a good way to narrow down your target budget, according to Horvath.
According to a 2019 BDC survey of more than 1,400 Canadian businesses, the average annual marketing budget for small businesses in Canada is just over $30,000, while budgets for medium and large businesses (those with 20 to 49 employees) are double that. Companies with 50 or more employees generally have advertising budgets of more than $100,000.
The advertising budget of a company should maximize the return on advertising dollars. Budgets should be created with a message that will resonate with target audiences.
Advertising cost efficiency can be measured in a number of ways. Ad-to-sales ratios, for instance, are calculated by dividing advertising costs by overall sales for a given period.