How Much Should You Spend On Advertising? Ultimate Guide

Should you even spend on advertising? The answer to this question is staggering and this is why you should care, Tesla grew from nothing to a multi billion dollar company and the CEO Elon Musk stated that Tesla has never spent any money on advertising.

Listen to Elon Musk speaking! After the video keep reading.

In 2019 alone, Tesla generated $24.58 billion in revenue.

google.com

And you might think, “that’s Tesla not just any other company”, let me clear the air for you. Another great example is Whatsapp.

Whatsapp grew organically and was acquired by Facebook in 2014 for $19 billion.

Here is the average Joe though! Average Joe runs an ecommerce site that barely gets any sales. Average Joe has lost a lot of money on paid ads and he is already frustrated wondering how this information will help him.

When average Joe thinks about Tesla and Whatsapp he is intimated. He thinks it’s impossible to recreate such successes within the current times.

Here is an example for the average Joes’, Tatiana James. Tatiana runs an ecommerce store via Shopify and generates over $300,000 per month organically with $0 in ad spend.

She is 26 years old as of 2020 and started her business about 4 years ago. Her main lead generation strategy is social media.

Below is her monthly sales snapshot in the month of April 2020

(credits: Tatiana James, youtube)

If you think there is a recipe or formula to all this stick around.

Here is the other side of the coin though, absence of marketing and advertising in general was one of the reasons that lead to the fall of HTC in 2015 despite their positioning, this made them shift their focus from smartphones to VR headsets in 2016.

HTC Market Share was at par with Samsung as at June 2012, this was before their downfall.

In the line graph below the first line from the top is Apple, the second line Samsung and third line is HTC.

Then this happened. The separation and downfall, marked below

What can we deduce from this?

So how much should you spend on advertising? Should you even advertise in first place?

To make an informed decision, we will consider the three pillars below

  1. What is the nature or type of the business? Is it an online business or a local business. Does the business involve offering services or selling a product.
  2. What is the market or industry of the business? Would advertising move the needle in that particular industry? What can be the expected profit margins?
  3. Lastly, what is the current situation of the business. Is it a start up, a growing business or an established business? Are the goals of the business profitability or growth?

Here is one more additional thing you should remember at all times.

A good product that people want will sell more with horrible marketing than a product that people don’t want with the best marketing in the world.

Foundation

Before you figure out how much you should spend on advertising you need to have your foundation already set.

Foundation includes:

  • Brand identity i.e business name, logo, brand colors etc.
  • Website design and development.
  • Copywriting (great copywriting moves the needle for a business)
  • Customer experience
  • Customer care
  • Product or Service delivery
  • Tools i.e reporting systems, integration platforms etc.

Warning! Don’t get hang up in the technology. You may end up wasting your time and money. Remember if something doesn’t make you money it looses you money.

If you buy things that you don’t need you may end up selling or giving up things that you need. You need to be lean and frugal.

Example: A fancy $2000 logo is not necessary for a starting business. Customers don’t care about your logo they care about the value you provide, your ability to deliver and how you do it.

For some businesses, you don’t even need a logo at start up phase, a logo can be as simple as your domain name in some corporate typography, 100% free to create, that’s it.

Examples

Medium logo
Forbes logo
Consulting.com logo

Consulting.com generates over $20 million a year and they don’t need a fancy logo or a remake to maintain or increase their revenue and they are extremely profitable.

At the same time for industries that please the ego and bring a feeling of more self worth, a decent logo would go a long way in communicating the brand image. This includes fashion industries, make up industries etc.

A hotel at the middle of a big city would also benefit from a decent logo. When I say a decent logo I don’t mean an expensive logo. Stay lean.

If you are on a budget and you are in this industries, your logo can be as simple as your domain name in some luxury font which is 100% free to create, you can always get a decent logo later if necessary.

The idea here is getting your feet wet to validate your idea and proof of concept without complicating the process, taking too much time or spending a lot of money.

Only get something if it’s absolutely necessary.

Going back to foundation, if you have a strong foundation your business will be running smoothly with minimal or optimal advertising cost depending on your business goals.

With a weak foundation however, the business will lack direction and identity and you are more likely to misuse funds. Funds that would have been channeled to advertising or other critical areas will constantly get used up to mend the weak foundation.

It is also important to revisit your foundation from time to time, this can be from 1 year, 3 years or even 5 years depending on the nature of the business, the market etc.

Example: Website redesign every 3 years to keep up with current technology or refresh your brand. Such expenses should not count as part of your advertising budget.

Lets breakdown each business type according to the three pillars we talked about earlier:

Nature Of The Business

Local Businesses/Brick And Mortar

This basically covers small business owners with a physical location. If you don’t own a local business and not planning to own one in the future feel free to jump to the next section. (I highly recommend you read this)

Despite the growing popularity of online businesses, majority of the sales worldwide occur from brick and mortar sectors.

This businesses can survive without an online presence but an online presence can be a game charger if done right.

This can be through increasing brand awareness in the particular business location or getting orders and sales through the website.

This can also attract clients from nearby locations or even other places if the positioning is strong, the customer experience is great etc.

Example 1: Some families believe only a specific company can mow their lawn, others will under deliver.

Example 2: Some people stick to specific barbers even after shifting their location, they think other barbers will mess up their hair.

This businesses through come with some limitation

  • High expenses i.e rent, paying employees, operating cost etc
  • Small profit margins.
  • Expensive to expand/inability to expand quickly, unlike in online businesses
  • High competition, you can have a line of restaurants in one street

For this reasons, big advisors in this sectors developed the 5% rule where they recommend allocating 5% of the total revenue generated to advertising and marketing.

If you are doing less than $5 million a year in sales, the U.S Small Business Administration recommends spending 7 to 8 percent of your gross revenue in advertising and marketing, this total to about 10 to 12 percent of your net profit.

There is a hack though, a secret that I am about to reveal to you.

If you can be able to overcome this challenges, you can potentially spend more in marketing if needed or spend more in other vital areas subsequently making more money.

Example: If you are a gym owner, one major bottleneck is that you cannot accommodate more people than the size of the gym can allow.

A solution would be to start offering online gym session to high paying clients. With this solution you are no longer limited to space.

Real life examples:

The couple below runs a gym in Austin, Texas. To overcome space problem they included online classes and created their funnel though Clickfunnels.

After including online classes their income grew to over $1 million and they received the Two Comma Club Award.

Their income shot to the roof and recently they received the Two Heart Award for donating over $1 million to charity.

Clickfunnels Official Facebook Page

If they hadn’t included online classes they wouldn’t have been able to reach such heights.

Example 2:

Sam Mollaei is a business lawyer. His physical business location is in Beverly Hills, California.

From the post below he received the Two Comma Club Award for making over $1 million dollars from his funnel.

The presence of a funnel enabled him to work with clients beyond his physical location.

Clickfunnels Official Facebook Page

This are just few examples. You’d be surprised if I told you majority of the Two Comma Club Award winners are brick and mortar industries that have an online presence and a funnel in place. From my observation so far, this is true.

Don’t get hang up with the technology though, if you can’t afford Clickfunnels subscription, Wordpress is fine.

The idea here is to show you how others are doing things differently to overcome their challenges and the results they are getting.

Bottomline

If you’re already running a local business and you only have an online presence without a solid system that bring in leads, stick to the 5% rule until you can be able to overcome the challenges that throttle your business.

Consider overcoming this challenges as strengthening your foundation.

Overcoming challenges isn’t just about having a funnel in place or getting sales from the website. It includes everything else that can help overcome these challenges.

Example: Expanding to other regions or starting a franchise can be a good way to overcome challenges in addition to having a solid system in place.

The 5% will include all your marketing efforts.

Photo by Clement Brian

This marketing efforts won’t apply to all businesses, pick the ones that will have the biggest impact on your business or the ones that you think are appropriate.

For beginners I would recommend you first start with organic methods i.e word of mouth, referrals etc.

After having success with organic methods you can then venture to paid ads or methods.

Online Businesses

This businesses majorly fall into two categories.

  • Offering services i.e individual services like web design, logo design or Software As A Service (SaaS).
  • Selling products, either physical products or digital products. This can be through individually owned websites or selling platforms like amazon or ebay.

This businesses can also be done through different business models like affiliate marketing, CPA marketing, dropshipping etc.

Individual Services

For individual services the best approach is to start with organic methods. After having success in organic methods you can then transition to paid methods.

This services are majorly offered by a freelancers like I, a company or an agency.

Most people in this industries stick to organic methods and there are reasons to it.

One reason is to maximum profit margins or to avoid losses via paid methods, the other reason is that these services require a human to execute, how many tasks can a human handle at once?

So the lean approach is the best to manage workload while maximizing profits through organic methods.

Some of the best organic client acquisition methods include:

  • Social media i.e Facebook
  • Inbound marketing/blogging/SEO (providing value to your target audience)
  • Content Creation i.e youtube (Link youtube videos to your blog post)
  • Job boards i.e linkedin
  • Freelancer platforms i.e upwork, fiverr etc. (Pick one and focus on growth to position yourself better.)

None of this platforms is better than the other, it depends on your industry, what you are most comfortable with and what you can excel with.

Example 1: An introvert like me can find Linkedin or Youtube intimidating but when it comes to blogging or SEO I excel and I am very comfortable.

Example 2: If you are an extrovert like my mum, you might find blogging depressing since you are not interacting or networking with anyone. For this reason platforms like youtube, facebook or Linkedin can be good for you.

We are always advised to get out of our comfort zone and honestly it makes sense. The barrier of entry keeps getting slimmer day by day.

Not to worry though, in the above client acquisition methods each one of them can net you over $10k a month in revenue from clients.

If you want to make a big jump however, from lets say $15k a month to $1 million a year or $5 million a year, you need to be ready to get out of your comfort zone.

The grass isn’t always greener on the other side, the grass is greener where you water. Each one of them has potential, pick one and proceed from there.

Bottomline

Your business goals will determine what percentage of your net profit will be allocated to all your marketing efforts, whether paid or organic.

Start with organic methods first, after seeing success transition to paid methods.

Example Organic Method: If your lead generation strategy is SEO/blogging and you can’t write as many articles as you would like, consider hiring a writer.

Example 2: If your lead generation strategy is freelancer platforms and you can’t write and submit as much proposals as you would like, consider hiring a virtue assistant

If you don’t have a strong foundation, have a budget to strengthen your foundation. Even if it’s from external sources.

Last but not least, remember to be lean and frugal, don’t drive straight to a software or keyword tool that cost $99 per month.

This are direct recurring expenses that don’t guarantee any success. They are more likely to demoralize you than lift you, keep off.

Software As A Service (SaaS).

This businesses offer a specific target audience access to a software as a service hence SaaS.

The main difference between SaaS and individual services is that SaaS is not limited to human beings and the amount of tasks they can handle at a time.

For this reason workload is not a problem, a single software can be redistributed to thousands of individuals or more and a server with the software installed can handle has many people as the size of the server can handle.

This causes difference in the marketing approach of SaaS businesses.

Since there is no human limitation, many SaaS businesses prioritize growth over being profitable. Growth to capture as many users as possible, this is to enable profitability in the future.

This is because they are usually backed by venture capitalist, this makes them not worry much about expenses or making profits. Their only worry is to generate more revenue.

Analysis are usually made on basis of how much it cost to acquire a customer and the customer lifetime value.

Most of this start ups and Saas never reach profitability, and the end result is dying out after depleting their funds.

As a CEO of a Saas Company you need to be as sharp as a tack, I have been in the start up world myself and there is a lot we can talk but I will keep it simple with this vital tips.

Vital Tips

Before you think about marketing and advertising you need to have a strong foundation in place.

Foundation for SaaS lean more towards this two points:

  • Customer Experience
  • Establishing a unique value preposition (Copywriting)

In SaaS the most important thing is nailing the timing, basically establishing product/market fit with perfect timing.

Once you’ve archived this, the product pushes itself, you customers become your sales men, all you have to do is keep expanding the backend.

The difference between SaaS that have achieved this and those that have not is like day and night.

Those that have can grow organically without relying on paid methods to push the product.

A good example that we had discussed earlier is Whatsapp. Whatsapp grew organically to 450 million users before its acquisition.

The revenue percentage allocated to marketing and adverting depends on the SaaS goals. Some SaaS prefer to go the profitability route rather than the growth route, which is perfectly fine.

SaaS businesses should look and see what moves the needle in their industries and put majority of their funds there.

This businesses are dynamic and they differ from one to the other. Picking a specific percentage of the total revenue generated to be used in advertising is not feasible, it all depends with the CEO, where he decides to put the money.

Apart from the initial snowballing processes (the launch) which might require paid methods, the best way to grow a SaaS is by organic methods.

Example: Influencer marketing is a powerful way to snowball a Start Up. You should ask yourself, who are the 100 people in this industry you should contact?

90% of Honey marketing efforts were centered on using influencers. Paypal completed acquisition of Honey on January 6, 2020 at a sum of $4 billion.

Probably after the snowballing process they observed that it was working for them and they continued doing it.

Other methods you can use are: google adwords, Facebooks ads, snapchat ads, sign up bonuses, affiliate program etc. The most important question you should ask is where are you likely to find your target audience?

Consider the snow balling process as setting up your foundation.

The best strategy is to first start with organic methods after seeing success you can then include paid methods.

Hubspot is good example of a SaaS that has grown organically through inbound marketing/blogging.

Some of the best organic methods for Saas include:

  • Social media i.e Facebook, twitter, Instagram etc. (Increases brand loyalty)
  • Inbound marketing/blogging/SEO (providing value to your target audience)
  • Content Creation i.e youtube (Link youtube videos to your blog post)
  • Product integration/Joint Venture
  • Networking etc.

Hubspot picked SEO as their lead generation strategy, and they become famous for it. They even started teaching others how to do it.

Products

This includes physical products and digital products

Just like in services where we have individual services and SaaS, physical products and digital product compare the same way

Physical products

Physical products come with some challenges like sourcing from suppliers, fulfilling orders etc.

Selling physical products may require more human resource than selling digital products.

The profit margins of physical products are lower compared to digital products.

Due to this challenges, the strategy is almost similar to that of individual services.

Recap

Have a strong foundation.

If you have to use paid methods only use them to strengthen you foundation.

Use organic methods of marketing, some of the best include:

  • Youtube (Content Creation)
  • Instagram
  • Facebook

You remember Tatiana? She mainly uses Youtube, Instagram and Facebook.

On the month of April she made $343,782.11 on Shopify and $40,162.09 on amazon. Her net profit margins are 61% on Shopify and $41% on amazon.

Start organic, you can always experiment with paid methods later.

Digital Products

Digital products don’t have limitations of human resource, fulfillment etc. The strategy employed is almost similar to that of SaaS.

A digital product can be redistributed to as many people as possible with ease.

To check the strategy and how much you should spend on advertising refer from Saas.

Bottomline

Start with organic methods first, after having success you can then experiment with paid methods.

Market Of The Business

In this section we will analyze different industries and markets and the impact of advertising on them.

We will also try to settle the paradox between Tesla and HTC and help you understand why things went down the way they did.

Car Market

The car market is a high competition industry, in the last decade it wasn’t a surprise to here another automotive manufacturer has gone bankrupt.

This industry is not only competitive but also has loyal customers who buy the same car, from the same company after the one they previously owned got old.

The big whales in this industries had created a molt and a bond with their customers and doing things the way they did was fighting a losing battle.

Elon Musk Knew exactly what he was dealing with and in order to conquer this market he had to do things differently.

Removing The Molt

His way of removing the molt was changing the technology around the product and presenting the product to the market with a much better modern technology.

And not just better technology, but technology that would make his product outshine the other products 10 to 0.

From a logical point of view the market always goes with the better products.

Only by doing this can the buyers prefer to buy a much better product from a growing company than inferior products from an established company.

This has also been seen in effect in other markets as well.

Example:

  • Emails back in the days didn’t have a good user experience. Email providers back then capped a user to a limited size of storage, lets say 100 megabytes.
  • So what would happen is your email account storage size would fill up and you would constantly have to delete old emails to accommodate new emails.
  • If you failed to do the clean up you wouldn’t receive any new emails.
  • The programming languages used had a bad User interface and users had to reload to check for new emails which reloaded the whole website.
  • Reload processes were also initiated when users navigated though different email classifications.
  • Then gmail came to the picture, gmail removed the storage limit, they went ahead and made the experience to be way much better.
  • They used JavaScript which resulted to a good user interface and no reload process where initiated when new email are received and when users navigated to different email classifications.

The principle above can be replicated in other industries as well, this is one of the best ways to establish product market fit with perfect timing.

Tesla Client Acquisition Strategy

Tesla doesn’t spend any money on advertising, you probably wondering why they flourish and HTC went that path and they failed miserably.

Here is the answer:

Tesla doesn’t spend any money on advertising but the CEO Elon Mask does a very powerful form of marketing known as Lifestyle Marketing.

Lifestyle Marketing is where he leverages his own personal brand to sell you a lifestyle. This makes him appear as the face of the company.

Doing this helps him leverage his personal achievement and successes to push the brand.

This is accompanied by a near flawless high quality product that beats the competition 10 to 0.

Even if the product is expensive compared to competition, you can’t help yourself but buy the product. In case of Tesla the price difference is not that much.

Steve Jobs used this same strategy. In the case of Iphones, they were expensive compared to competition and people still lined up to buy them the week of the release and if they waited they could buy the next week without making a line.

This shows you the power behind it.

Smartphone Market

The smartphone market is pretty new, you can’t compare it with automotive industry that dates back to the 1950s

During its making, technology was at the heat of it and saying it mean’t everything I wouldn’t be far off. It covered both software and hardware leaving no stone untuned.

Competition was stiff, some players were quick to adapt and those that weren’t paid for it.

Clearing the molt

Nokia was once the biggest mobile phone maker and they attributed that success to their OS Symbian. Then android came in, by far better than Symbian. Google saw the potential and bought it.

Those that didn’t adapt quickly like blackberry and nokia got punished.

On the other hand HTC and Samsung were among the earliest to dive in and it paid off.

At some point they were at par with each other second to apple, but HTC bad decisions lead to their downfall.

HTC Gone Wrong Strategy: Understanding The Paradox

HTC sold their product with the messaging ‘quietly brilliant’ but their technology was the same as that of a neck to neck competitor.

There was no big difference between a good htc phone and a good samsung phone, both used android.

Apple was even way ahead of the two in terms of technology and product quality in the market.

The strategy above requires you to be the leader in your industry. (iphone OS was a different technology that made it the leader in the industry)

HTC CEO didn’t practice Lifestyle marketing. As much as most people knew Elon Musk and Steve Jobs, very few people knew him. Basically he didn’t have a personal brand that could gain traction and get him a cult of followers to help him push the brand.

Absence of marketing basically mean’t death and that is exactly what happened.

Before

(View Link)

After

(View Link)

On the other hand Samsung continued pushing their technology and marketing all together.

HTC mistakes were an advantage to them. Samsung market share continued to soar and it increases to this date.

Now they are very strong that they can make mistakes and go unpunished. From the line graph above you can clearly see they don’t have a close competitor.

Conclusion

Have a strong foundation, if the foundation is weak you can use paid methods to strengthen it.

Use organic methods, after having success with organic methods you can then start experimenting with paid methods.

Have a marketing plan for all your organic marketing efforts. This will help streamline the marketing process.

If you feel having a marketing plan will complicate the process especially for new businesses you can as well ignore it. Sometimes we tend to get stuck in the planning process rather than getting shit done.

Get shit done! Remember it’s not what you know that makes you rich is what you do with what you know, take action. Only actions bring results nothing else.

All the best in your marketing efforts.

I write. My life purpose is to help others and positively impact the world.

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