As you build your business, you know that 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 cost or a variable one? It can be a confusing question. We’ll look more deeply 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 quite true. A fixed cost is a cost that remains constant no matter how many products or services you produce.
For example, if you made shoes from leather, the amount you spend on leather would go up as you produce more shoes. If you made fewer shoes, you would spend less on leather. That means leather is a variable cost.
However, if you had a shoe factory with a monthly rent payment, that rent payment would stay the same whether you produced 100 shoes or 100,000 shoes. So the rent payment for the factory is a fixed cost.
Other common variable costs are labour, commissions, and raw materials. Fixed costs include rent, insurance, and interest payments.
Looking at Advertising Costs
So is advertising a fixed cost? Based on the previous definition, it is. The amount you spend on advertising isn’t going to increase based on each pair of shoes you make — instead, it’s an investment that you make regardless of your production.
However, that doesn’t mean that you have no control over advertising costs. The truth is that you can choose to spend more or less on advertising at any time. So the amount you spend on advertising can change dramatically while still being considered a fixed cost.
That’s why it’s challenging to categorize advertising spending. It’s not based on how much you produce, but it is still something that you can control. You can raise or lower your ad spending anytime.
How Much Should You Spend on Advertising?
Small businesses often struggle to determine how much to spend on advertising. On one hand, if no one knows about your business, you won’t have anyone 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 your return on investment (ROI) when it comes to advertising. Take a look at your customers and determine how much money you make on each one. What is a new customer worth to your business? If they generally make a one-time purchase of $45, the answer is $45. If the average customer buys a six-month membership at $100 per month, the answer is $600.
It’s 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 that’s 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 lower the amount you have to pay to get a new customer. That’s how you increase profits quickly.
Marketing vs. Advertising
Advertising can get expensive quickly. The good news is that advertising isn’t the only way to spread the word about your company. You can also use marketing, which is a different approach.
Advertising requires you to pay for the privilege of interrupting a consumer while they are doing something else — watching TV, listening to music, or scrolling social media. Marketing allows you to create engaging informational content that users are already interested in and use that to draw them in to your company.
When your business is still getting established, combining advertising and marketing is important. Marketing takes time to create strong leads, so advertising can bring in some new customers in the meantime.
However, after a while, you’ll find you can spend a lot less on advertising and simply focus on marketing. And as you establish your presence in the market, you won’t need to spend as much on marketing either. You can get great results for far less money.
Are You Spending Too Much on Advertising?
We know that advertising is a fixed cost, but it’s a cost you’re fully in charge of and you can make changes as needed. Now that you understand the difference between marketing and advertising, you might realize that you’re spending too much on ads and not enough on your long-term marketing presence.
We’re here to help. Local SEO Search has helped thousands of small businesses succeed and gain 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!