Before you pour money into advertising, figure out exactly how much you should spend.


Q: I've never really done much advertising for my business; I've always relied on networking and word-of-mouth. Now I'd like to launch a small campaign, but I'm frightened it will cost a lot of money. How can I figure out where to start?

A: The first thing you must do is calculate your minimum and maximum allowable ad budgets:

• Step 1: Take 10 percent and 12 percent of your projected annual, gross sales and multiply each by the markup made on your average transaction. In this first step, it's important to remember that we're talking about gross markup here, not margin. Markup is gross profit above cost, expressed as a percentage of cost. Margin is gross profit expressed as a percentage of the selling price. Sell an item for $150 when it only costs you $100, and your markup is 50 percent. Your margin, however, is only 33.3 percent. This is because the same $50 gross profit represents 50 percent of your cost (markup,) but only 33.3 percent of the selling price (margin.) Most retail stores in America (carpet, jewelry and so on) operate on an average markup of approximately 100 percent, some operate on as little as 50 percent markup and others add as much as 200. More expensive items, such as cars, recreational vehicles and houses, typically carry a markup of only 10 to 15 percent.
• Step 2: Deduct your annual cost of occupancy (rent) from the adjusted 10 percent of sales number and the adjusted 12 percent number.
  
• Step 3: The remaining balances represent your minimum and maximum allowable ad budgets for the year. At this point in the calculation, you may learn that you've already spent your ad budget on expensive rent, or you might also learn that you should be doing a lot more advertising than you had previously suspected.

Now let's calculate an ad budget. Assume that my business is projected to do $1 million in sales this year, I have a profit margin of 48 percent, and my rent is $36,000 per year. The first thing to do is calculate 10 percent of sales and 12 percent of sales ($100,000 and $120,000, respectively).

Second, we must convert my 48 percent profit margin into markup, because markup is what we've got to have to make this formula work. Most business owners know their margin by heart, but never their markup. To make the conversion from margin to markup, simply divide gross profits by cost. Dividing $480,000 (gross profits) by $520,000 (hard cost) shows us that a 48 percent margin represents a markup of 92.3 percent. Bingo.

Now we multiply $100,000 times 92.3 percent to see that our adjusted low budget for total cost of exposure is $92,300. Likewise, we multiply $120,000 times 92.3 percent to get an adjusted high budget for total cost of exposure of $110,760. From each of these two budgets, we must now deduct our $36,000 rent. This leaves us with a correctly calculated ad budget that ranges from $56,300 on the low side to a maximum of $74,760 on the high side.

Most advertising salespeople will tell you that "5 to 7 percent of gross sales" is the correct amount to budget for advertising, but don't you believe it. It simply isn't possible to designate a percentage of gross sales for advertising without taking into consideration the markup on your average sale and your rent. Yes, expensive rent for a high-visibility location is often the best advertising your money can buy, since a business with a good sign in a high-visibility location will need to advertise significantly less than a similar business in an affordable location. To prove this, just look at the example above and change the rent to $75,000 per year. In this case, the ad budget would range from $17,300 to $35,760, representing just 1.7 to 3.5 percent of sales. The formula I've given you is the only one that reconciles your ad budget with your rent as well as the profitability of your average sale. Good luck!


--Roy H. Williams--

So you have a website.  

Below are some simple website "must-have's" that may be obvious but critical to engaging and motivating your customers to help drive company sales.

1.  Location & Retail Hours 

     No customer can buy from you if they don't know where you are and when you are open.  Integrating a simple google map along with your street address can easily help your consumer find you and buy your products or services.  

2. Contact Form

     Your consumer should be giving you their name and email address at a minimum so that you can store it and email them your special offers.  Adding a physical address and birthdate could help too.  The more information you get the better for contacting them at a later time.  

3. Show Your Social Media 

     If you are integrating Facebook, Twitter, Pinterest, LinkedIn, etc. in your business, make sure you provide icons that click to your page to give your consumer the chance to view your updates.

4. Clean Navigation & Site Map

     No one has the time to click around your website all day. Make the navigation clear and concise so they buy from you and not your competitor.

5. Obvious Call-to-Action

     What do you want your customers to do when they are on your page? Let them know! Make your service obvious and unambiguous so that your offers are clear and your customer makes a purchase.

A wooden sign in the lobby of Starbucks' China headquarters lists the provinces where the company operates and the number of cafes in each locale. But the coffee chain is growing so fast that it's become impossible to maintain the tally.

"We can't update that board!" said Starbucks China Chief Marketing Officer Marie Han Silloway, bursting into laughter. "Forget it!"

Ms. Silloway, a vivacious Chinese-American raised in New York, came to China a decade ago to lead Coca-Cola Co.'s Sprite in its second-largest market. She joined Starbucks a year ago, eager to return to her marketing roots after five years at executive-recruiting firm Korn Ferry International.

Starbucks China Chief Marketing Officer Marie Han Silloway
But unlike Sprite, which was already a giant in China when Ms. Silloway joined it, Starbucks is just now gaining its momentum. The Seattle-based company has been in China for 13 years, with an initial presence largely in major international hubs such as Beijing, Shanghai and Guangzhou. There's huge potential for growth as it expands into lesser-developed cities with newly robust discretionary spending. But it also faces uniquely Chinese challenges when it comes to customs and taste. Ms. Silloway's marketing strategy focuses as much on educating the world's oldest and largest tea-drinking culture as it does traditional branding and promotions.

Starbucks expects China to become its second-largest market by 2014. The company has more than 600 stores in the country and aims to reach 1,500 by 2015. It's a growth strategy that involves opening roughly one store every day for three years.

"We've been very blessed. Starbucks has very high brand awareness to a lot of people in China, so when we go to a new city or existing city, a lot of customers know about the brand already," said Belinda Wong, president of Starbucks China.

Starbucks' greatest asset is that its target consumer in China sees it as an aspirational global brand offering an international cafe experience.

'You've arrived as a town when'
"The way you know when you've arrived as a town or city is when Starbucks arrives. It used to be McDonald's, and before that it was KFC," said Paul French, chief China-market strategist at market-research firm Mintel. "Now Starbucks is the place where you go if you have cash and want to flash it. The new middle class can sit there and look out the window and drink their Frappuccino and say, "We've made it.'"

Ms. Silloway, who works with the China offices of BBDO, JWT and Agenda on advertising and Edelman for PR, looks after the food and beverage categories and new-product innovations as well as marketing and branding. "It's a broad remit but it makes a lot of sense because it allows us to have a complete picture of how the brand shows up in total. We're always working in lockstep with operations," she said.

That integration was on display on a sunny late-summer day in the dusty city of Nanchang, as Starbucks opened its first location in the traditionally agricultural province of Jiangxi and in its 49th city in China. Five hundred miles inland from Shanghai, Nanchang is among hundreds of second-tier cities across China with major untapped purchasing power. Retailers such as Uniqlo and H&M recently opened outlets here. Starbucks is in a downtown shopping mall, between an Omega watch store and a KFC.

The grand opening kicked off with coffee education for local media. An ultra-perky barista named September told the packed room that "latte" means milk in Italian, so a latte is a coffee with milk. "American-style coffee is black coffee," she explained, "so if you order one in the morning you'll be awake and alert all day!"

By early afternoon the cafe was buzzing and packed with customers. Some ordered with ease; others asked for suggestions. Vanilla latte is a common recommendation, described by baristas as "not too sweet."

One young man with a peach-fuzz mustache wearing a Bob Dylan T-shirt ordered a coffee -- at room temperature. (It's common in China to serve water, soda, beer and other beverages at room temperature.) The barista paused, then suggested an iced coffee with no ice. The Dylan fan seemed happy with that.

In China, Starbucks is a place to sit back and relax.

High-school student Yang Yang, 16, waiting for her vanilla latte, came to Starbucks with a girlfriend. "I don't actually like coffee, but my friend invited me. It's a good place to chat with friends," she said.

At one table, water-utility employee Wan, 26, surfed social media on his smartphone while killing time until an appointment. His $5.20 vanilla latte was a bit pricey, "but it's OK because I can sit here for a while," he said. And if Starbucks weren't here? "Then I'd be sitting at KFC next door."

The customers inside Starbucks are already converts. One challenge for Starbucks is to persuade those outside the store to come in and try its -- by Nanchang standards -- exotic and expensive offerings. One passer-by spotted the Starbucks sign and asked: "What is this place? A Western restaurant?" and walked away.

Or take the government minder who was tailing this Ad Age reporter in Nanchang. Fu Xiaobin frequently talks business in teahouses where private rooms cost upwards of $200. This was his first Starbucks experience and his opinions reflect how difficult it can be to grow the target demographic beyond young urbanites.

Who drinks coffee? 
"I think coffee is more of a woman's drink, don't you?" Mr. Fu asked. "If you were doing business with a woman then maybe you could bring her to a coffeehouse. But if you were doing business with a man ... you go to a restaurant and talk business over a meal or you go to karaoke and make deals while you sing together. The idea of men talking business in a place like Starbucks ... I think that's just ridiculous."

Local food reporter Fan Yuan, who was broadcasting live from the store, pointed out another major challenge for Starbucks in China: its takeout business is minuscule. The vast majority of people go for the experience of hanging out at Starbucks.

"There's definitely some people in Nanchang who have a habit of drinking coffee every day, but they're really a minority," she said. "People want to sit here and relax. There will probably be some takeout orders, but really, it doesn't work in this market."

Mr. French, the analyst, joked that Starbucks would make more money if it gave away free coffee and charged customers by the hour to sit in its stores.

Starbucks also has room to grow its food selections. Although the company has created products tailored to Asian preferences, such as its black sesame green-tea cake roll, local competitors are more creative, offering hot meals such as curry and pasta. Others sell dessert plates with six mini egg tarts or other sweets, designed for the group dynamic.

"That's perfect for Chinese because they like to put a plate in the middle to share. Westerners just want a big fat muffin each," Mr. French said.

Starbucks' image as a trendy and modern brand helps mask the bigger question: whether Chinese will ever actually like coffee, something often described as "too bitter" to enjoy. Starbucks' R&D center in Shanghai has responded to that concern by developing popular fruity drinks such as Strawberry Soy Frappuccino and the Refresha line of juice beverages.

Jiang Shan, 28, is an aspiring restaurateur who spends eight hours a day, every day, at the Nanchang Starbucks. He is actually a coffee connoisseur from working in Western restaurants in bigger cities.

"I look around," he said, cradling a venti Americano, "and everyone in here is having some sort of icy concoction. I think I'm the only person with an actual coffee."

HOW TO RUN A COFFEE SHOP
Consumer insights for Starbucks in China:

Starbucks is a place to socialize, and most Chinese visit in pairs or groups. Seating is configured to reflect that, with large community tables or living room-style setups of couches and armchairs clustered around a coffee table.

In the U.S., many Starbucks are kiosks targeting the grab-and-go segment. But in China, stores must be spacious enough to accommodate consumers who linger for hours.

In China, Starbucks does the majority of its business after 2 p.m. "People like to come out for an afternoon coffee, a cake, meet up with a friend," Ms. Spillway said. "Walk into any Starbucks at 4 p.m. ... it will be very hard to find a place to sit."

Many Chinese offices are drab and crowded, making Starbucks a popular place for business meetings. A Starbucks meeting has the added bonus of making the host seem international and sophisticated.

Consumer education is essential. Starbucks' target consumers are urbanites interested in international experiences, and they're curious enough about coffee to spend $5 on a drink when an average office worker's salary is about $1,000 a month. Baristas are trained to teach consumers about the products, and stores regularly host coffee seminars.

--Anita Chang Beattie--

At a small industry event last week, I led a talk about the future of TV and video advertising in the U.S. over the next five to 10 years. Rather than just talking about emerging trends and leaving it there, I decided to offer up some specific predictions. As a startup guy, my job is to make bets and try to build businesses in advance of markets, or at least contemporaneously to their development. While it can be a bit perilous to go public with predictions, it can also be fun, so here are my "bets" on what the world of TV and video advertising will look in 2020:

1. Web-driven ubiquity. Television's history has been defined by constrained distribution, but that's about to change. Broadcast defined its development of sight, sound and motion programming and adverting delivered in virtually every home in America. Analog cable expanded the product in breadth and depth. Digital cable amplified that expansion. And, later this decade, TV will enter the fourth and most disruptive phase of its development, web-driven ubiquity, when TV video will be "technically" freed from its legacy TV-dominated distribution constraints. By 2020, I believe that all television will be ubiquitous, on-demand and intelligent.

2. 30-40% more video consumption. The explosion in video availability will drive even more consumption. As hard as it may be to believe, I expect total video consumption will grow 30-40% over the next seven to eight years. How is that possible when the average American already watches four and one-half hours a day? Today, most video is consumed in the home, with smaller amounts in the office or in restaurants or bars. In the future, with more screens in more places, even today's time-constrained light TV viewers will be watching more.

3. TV device will still dominate viewing. Today, viewing on the TV represents 95-98% of all video consumption in the U.S. While it will lose some share to other devices, consumers' preference for the best available screens mean that "lean-back," TV-like devices will still capture the majority of viewing. My bet is 70%.

4. Multi-channel packages will still prevail. Contrary to the views of many, I don't believe that most TV viewing in 2020 will go a la carte. No, I expect that 70% of viewing will still be tied to multi-channel subscription packages from operators and networks. Consumers have always favored "packaging" in their media and the owners of the programming have way too many long-term business interests in doing deals with distributors who will "un-bundle" their products. However, I expect extraordinary disruption in this segment of the market and believe that 50% of the "bundlers" will be new.

5. Ad dollars follow video viewing and screen impact. Sight, sound and motion will continue to be unparalleled in its ability to create customers or reinforce loyalty, and it will only get better with more ubiquity, more content and better technology. Video will continue to dominate ad and marketing expenditures and, as web-like ad technologies transform its targeting and yield management, growing its efficiency and the number of advertisers using video.

6. TV "dog" wags smaller devices "tail" in campaign bundles. Not only will TV not lose its ad dollars to the web and small devices, but most of the digital video ad spend will be bundled with campaigns anchored on TV and controlled by TV media owners. Only a modest minority will be sold and packaged for stand-alone delivery on mobile, tablet, PC or ambient devices, though out-of-home video might be an exception. Assuming that they learn how to leverage it's digital capabilities, this will keep the TV media owners and media buyers in firm control of the digital video future.

7. Audience, not just content, becomes critical for advertising. Audience fragmentation, already a problem on TV today, becomes exponentially worse with the explosion of even more screens and more content. The ability to re-aggregate target audiences at scale becomes essential for all video media sellers and buyers. No longer is it just about putting ads in relevant content. It's about finding, packaging and delivering the right target audiences across tens of thousands of networks and shows too. Surviving and thriving in ever-increasing audience fragmentation is probably the biggest challenge today's media companies and marketers will have in finding success in 2020.

8. Audience data becomes indispensable. You can't find, package and deliver target audiences without having the data to do it. By 2020, 90+% of all video ad campaigns will be "data-denominated" -- packaged, sold, bought, optimized, measured or evaluated on granular data beyond impression, rating, GRP and demographic metrics. Media owners that underpin their content offerings with robust audience data capabilities will prosper. The same for marketers and their media agencies. Those who don't won't.

9. Exacting measurement and attribution reign. All video media and advertising will be measured and evaluated at the census level with attribution and return on investment analysis that far surpasses what we have today. Media that doesn't deliver great results at the right price will go away. The same for agencies, marketers and people not comfortable operating in that kind of environment.

10. Foresight trumps insight. With wide availability of census-level behavioral data and massive, predictive computing power, data leverage moves from insight to foresight and the power and margins in media will go to those companies who predict, create and exploit consumers' future behaviors. Companies and people not comfortable predicting the future and making successful bets on it won't last long.

These are my bets for the video ecosystem in 2020. Will they all come true? I don't know. However, they are the bets I made in launching Simulmedia, so at least my money is where my mouth is. What do you think 2020 will look like?

--Dave Morgan--

EBay, owner of the world's largest internet marketplace, is looking to expand in China by teaming up with luxury retailer Xiu.com, according to a person with direct knowledge of the pact.

EBay will announce the partnership at an event on Nov. 12 in Shenzhen, China, where Xiu.com is based, said the person, who asked not to be named because the plans haven't been publicly disclosed.

The pairing marks the first major drive by EBay CEO John Donahoe into the most populous country since he took over in 2008. He'll face competition from sites such as Alibaba Group Holding Ltd.'s Taobao.com, China's largest online retailer. EBay retrenched in China in 2007, and highlighted the challenges of profiting in the nation in a January regulatory filing.

"In 2002 we withdrew our EBay marketplace offering from the Japanese market, and in 2007 we contributed our business in China to a joint venture with a local Chinese company," the company said in the filing. "Even if we are successful in developing new markets, we often expect the costs of operating new sites to exceed our net revenues from those sites for at least 12 months in most countries."

EBay, based in San Jose, California, rose 2 % to $49.22 at the close yesterday in New York. The shares had increased 62% this year before today. EBay doesn't plan to make an investment in the Chinese company, according to the Financial Times, which previously reported the Xiu.com partnership.

--Bloomberg News--