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How much should you spend on Advertisement
Every startup has this questions creating troubles. Is there any really proven scientific model that could decide your advertisement budget. Here in this article we will discuss a model that is generally used by many businesses to determine their ad budget. This is a theoretical model and must be appropriately adjusted based on your situation.
So we start like this, first of all calculate your minimum and maximum allowable ad budgets. For this, take 10 percent and 12 percent of your projected annual, gross sales and multiply each by the markup made on your average transaction.
Let us understand here what markup is actually, suppose you sell an item for 225 Rs, and its cost is 150 Rs then here your markup would be 50%, You should note down that mark up and margin are different, in the above case your margin would be 33.33%.
Now you should deduct your rent and other fixed expenses from this 10 and 12 percent of projected annual gross sale multiplied by mark up. The figure will represent your lower and upper advertisement budget limit.
Let us understand by a case study, suppose you sell an item that costs you 10 Rs and you sell it for 20, then here your markup would become 100%.
Now suppose you are targeting annual revenue of 2 Million, then 10 and 12 percent of 2 Million would become 200000 Rs and 240000 Rs.
Now multiply this 10% and 12% by your Markup which is here 100 % so it would be equal to 200000 Rs and 240000 Rs.
Now suppose your annual rent expense is 60000 Rs then your lower and upper Ad budget should be 140000 Rs and 180000 Rs.
So if you are expecting a revenue of 2 Million by the sale of a product that has mark up of 100 %, then your ad budget must be some thing between 140000 Rs to 180000 Rs.