Advertising.

The thing we micro-business owners try to avoid like the plague, because it costs money. And let’s be honest, many of us are just starting out, or running our biz part-time -and the last thing we have to splash around is spare cash.

While I am a huge fan of free advertising and using social networks to build a customer base, I think that for any online business (or any business, in fact) to really pull ahead and grow, it needs to be advertised.

Let’s think of some of the most successful brands in the world.

Did you think of McDonald’s and Coke? I’m betting you did, because they are the two most heavily advertised companies in the world, and their market share shows how effective smart, targeted ads are.

Now, I think that for those of us who sell our handmade goods and/or services online, we need to be very savvy about where we choose to invest that money – and my feeling is that keeping it in the online world is the best choice. After all, that’s where our customers are! I think a good ad in a targeted magazine might be awesome, too – but honestly, that is beyond the budget of most of us.

So – the first step in working out your advertising strategy is working out how much money you can devote to it.

How to Work Out Your Ad Budget

I decided to do some research online, and quickly realised that there is no one right way to work out your budget. However, I knew I wanted something concrete, not just ‘what felt right strategy’ – so after some reading I decided on the following calculation:

1. Take 10% of your annual projected gross sales. So, for example – if you sell around $500 worth of products in a month, you first multiply 500 x 12 to find your annual gross sales = $6,000. Then, divide $6,000 by 10 to find 10%. This gives you $600.

Remember, the gross amount is all the money you make – before you take any fees, materials costs, wages etc out of it.

2. Then, multiply this number ($600) by the average markup made on each transaction. “Markup is gross profit above cost, expressed as a percentage of cost.”

Huh? Okay, say your cushion cover uses $4 worth of fabric, and costs another $10 in labor to make it. You also add another $1 on this to cover overheads. This gives you $15 base cost. If you sell this cushion cover for $30, your markup is $15 or 100% – you’ve doubled the original cost price.

So, combining our two examples, you take $600 and multiply it by 100% – this gives you… $600. (For a more complex example – say your markup percentage is only 45% – you’d multiply $600 x 45%(0.45 on a calculator) = $270).

3. So, you’re left with $600.. and this is your annual ad budget! There are lots more little details we could add in to this calculation, but I think it’s a good point to start for most of us.

When I did this, it really made me think about how much of my earnings I wanted to re-invest in advertising – and that if I was going to make profit in the long term I needed to keep a lid on my advertising spending.

Especially for those of us who sell on Etsy – remember that each time you renew a product that hasn’t sold in order to get views.. that 20c is part of your ad budget! So use it wisely.

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So – do you have a budget set for advertising your business? Do you do any advertising at all? Please feel free to share in the comments!

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I used the following articles to help me work out my budget (especially the first one, though I’ve simplified it here):

Calculating your Ad Budget

How to Advertise: Plan your strategy

How much should you spend on marketing?