As you build your business, you know you need effective marketing and advertising. There are costs involved, but these are an investment in your business. However, understanding these costs correctly is essential if you want the best return on your investment.
Is advertising a fixed or variable cost? It can be a confusing question. We’ll take a deeper look at the cost of advertising and how to incorporate it into your marketing plan.
Understanding fixed costs
What is a fixed cost? You might think of a fixed cost as something that stays the same every month or every year, but that’s not entirely true. A fixed cost it is a cost that remains constant regardless of how many products or services you produce.
For example, if you make leather shoes, the amount you spend on leather will increase as you make more shoes. If you made fewer shoes, you would spend less on leather. This means that the leather is a variable cost.
However, if you had a shoe factory with a monthly rent, that rent would remain the same whether you made 100 shoes or 100,000 shoes. So paying the rent for the factory is a fixed cost.
Other common variable costs are labor, commissions and raw materials. Fixed costs include rent, insurance and interest payments.
Looking at the advertising costs
Like this advertising is a fixed cost? Based on the above definition, it is. The amount you spend on advertising won’t increase with every pair of shoes you make, but it’s an investment you make regardless of your production.
However, that doesn’t mean you have no control over advertising costs. The truth is, you can choose to spend more or less on advertising at any time. So the amount you spend on advertising can change dramatically even though it’s considered a fixed cost.
This is why it is difficult to classify ad spend. It’s not based on how much you produce, but it’s still something you can control. You can increase or decrease your ad spend at any time.
How Much Should You Spend on Advertising?
Small businesses often struggle to determine how much to spend on advertising. On the one hand, if no one knows about your business, you will have no one to sell your products and services to. On the other hand, you have fewer resources than a large company, so you don’t want to spend too much.
That’s why it’s very important to understand return on investment (ROI) when it comes to advertising. Take a look at your customers and determine how much money you make with each of them. How much is a new customer worth to your business? If they typically make a one-time purchase of $ 45, the answer is $ 45. If the average customer buys a six-month subscription at $ 100 a month, the answer is $ 600.
It is important to know how much each customer is worth because that affects how much you can spend on customer acquisition. You can’t spend $ 100 to acquire a customer worth $ 45, but you can if the customer is worth $ 600.
The best strategy is to both increase the amount your average customer spends and reduce the amount you have to pay to get a new customer. This is how you increase your profits quickly.
Marketing versus advertising
Advertising can get expensive quickly. The good news is, advertising isn’t the only way to get the word out about your business. You can also use marketing, which is a different approach.
Advertising requires paying for the privilege of interrupting a consumer while they are doing something else – watching TV, listening to music, or browsing social media. Marketing allows you to create engaging information content that users are already interested in and use it to attract them to your business.
When your business is still establishing itself, it’s important to combine advertising and marketing. Marketing takes time to build strong leads, so advertising can attract new customers in the meantime.
However, after a while, you will find that you can spend a lot less on advertising and just focus on marketing. And as you establish your presence in the market, you won’t have to spend as much on marketing either. You can get great results by spending a lot less.
Are you spending too much on advertising?
We know that advertising is a fixed cost, but it is a cost that you are fully responsible for and can make changes as needed. Now that you understand the difference between marketing and advertising, you may realize that you are spending too much on ads and not enough for your long-term marketing presence.
We are here to help. Local SEO Search has helped thousands of small businesses succeed and acquire high-quality leads and ready-to-buy customers through SEO and digital marketing. We’d love to show you what we can do. Contact us for a free consultation today!