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Setting An Advertising Budget

When it comes to advertising, you need to spend money to make money. But how much?

You'll need to devote a percentage of projected gross sales to your annual advertising budget. A good rule of thumb is to devote 2 percent to 5 percent of anticipated gross sales to this need.

There are two primary methods of determining your advertising budget more specifically. First is the cost method, which theorizes that an advertiser can't afford to spend more than he or she has. For instance, using the cost method to determine the advertising budget, and devoting 5 percent of gross sales, a business projecting $300,000 in gross sales in a given year would have $15,000 for that year, or about $1,250 per month, to spend on advertising. (Since businesses typically advertise more heavily when they first open, the same business could allocate more-about $2,500-for its grand opening.)

This may not seem like much money, and for some companies it won't be enough. These companies base their advertising budgets on the amount of money they need to attract the customer or sell the product. This is called the task method. A company using the task method typically determines how much money is needed based on past experience. Of course, as a start-up you won't have experience to go on. In this case, you'll have to base the figures on your business plan and market survey, which should estimate the costs you'll incur.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press

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