How To Tell If An Advertisement Costs Too Much
People say it all the time: "This advertising costs too much!" They practically go into cardiac arrest when they see how much the advertising for certain media in certain markets is going to cost them. It is pretty easy to get sticker shock when you see that a sixty-second radio commercial on a popular Los Angeles station could cost you a thousand bucks. Each. Or when you realize that all the "Dot.com" businesses in Silicon Valley have made radio spots on top stations in the San Francisco market cost as much as $2,500. A Minute. Or when you realize that a newspaper ad in your city barely bigger than a Hershey Bar will cost a couple thousand dollars. It's easy to automatically think that's a lot of money. Now here's the important question for you, the advertiser: Does the ad actually cost too much?
So what's the answer? The savvy advertiser will tell you that the cost of the ad is not the issue. What's important is the return that the ad will bring. if you were charged even as much as $40,000 for a sixty-second radio commercial that generated enough sales to make you a profit of $50,000, then would the $40,000 be A LOT? The answer is NO! Of course not! You'd be a fool not to beg, borrow, or steal the $40,000 so you could make the $50,000 profit! Try getting that kind of return in the stock market!
How do you think that these big companies can afford to spend a million and a half dollars for a thirty second TV commercial during the Super Bowl? The know that an enormous amount of people will see it--enough to make the return on investment a good deal.
The point is simple; you've got to figure out how much money an ad will make you before you draw a conclusion of whether or not it costs too much. So how do you do that? It's actually pretty easy. Here's a simple process for determining the Return on Investment, or ROI, of an ad. First, you've got to know how much profit you make on each sale. For instance, if you buy it for $50 and sell it for $100, your gross profit is $50. Step two is to figure out what your closing ratio is. If, on average, you close one sale for every four people who inquire, that's a 25% closing ratio. If 9 out of 10 end up buying, then your closing ratio would be 90%. This is simple math.
Now, figure out what your break-even is. Do this by taking cost of the advertisement and divide it by the amount of gross profit per sale. Remember, we already figured out what your gross profit is a second ago. So how much do the ads costs? If the ads cost $1,000 and your average gross profit is $50, that means you've got to make 20 sales to make back the $1,000--that's your break-even point--in this example, it's 20 sales. Fourth and last, figure out the number of leads you need to generate from the ad if you are to break even. To do this, you've got to know your closing ratio, which we just figured out also. Let's say it's 25%, or in other words, you close one out of four people who inquire. So if you close 25%, and you need 20 sales to break even, that indicates that your $1,000 worth of advertising needs to generate 80 leads to break even.
Now I know that all sounds kind of complicated, but it's actually pretty simple. We just calculated in the example that if the $1,000 ads can generate 80 leads, you would break even. That's a return on investment of 0. I'm not saying that your goal is to break even. I realize that you are in business to make a profit. But let's start with breaking even; that's the bare minimum you can accept when running an ad. At least you didn't come up with a NEGATIVE return on investment!
So let's say your goal was to double your money? What would have to happen to your numbers? That's right, you'd have to double your lead flow, or in this case, generate 160 leads instead of just 80. That means that if you generated 160 leads, you would generate a profit of $1,000--again, on $1,000 spent. In other words, you've doubled your money. Your return on investment is 100%. That's pretty easy to follow, isn't it? By way of review, what we're trying to do is calculate your return on investment for your advertising. Here are the four steps again. Think about your numbers in your business.
What's your gross profit per sale?
Now realize something important here. What we've just done in this exercise is figure out how many leads you need to generate to break even on the cost of the advertisement, and then calculated the ROI for how many ever leads your ads end up generating. That's a good piece of information to have, but now I want to take it a step further. Let's figure out what's known as the Lifetime Value of a Customer. What if your average customer brings you a $50 gross profit per sale like in the example we just went through? Is that the only time that customer will ever buy anything from you? How many times does that average customer come back in the course of a month, or a year?
If your average customer shops with you one time a month and makes you $50 of gross profit every time, that customer is now worth $600 a year--in profit. And if you know that your average customer stays with you for 3 years, now that $50 a month client is worth a tidy $1800. So now how much would you be willing to spend to accrue that client? What if those were your average numbers, $50 a month for 3 years. Then in the example earlier, remember where we broke even with 80 leads and just 20 sales? Now those 20 customers would be worth an astounding $36,000 over the next three years. And it only cost you a thousand dollars worth of advertising. Now your break-even looks a lot better doesn't it! If you could accrue a $36,000 annuity every time you ran a thousand dollars' worth of ads, you should mortgage your house and spend as much money as possible on advertising!
Now, a couple of words of advice when figuring your return on investment for advertising. First, always estimate your numbers conservatively--or in other words, on the low side. Always figure on getting a lower number of leads than you're hoping for and expecting. Always count on a lower closing ratio than you're used to. If you calculate your numbers using conservative figures, then you'll do fine if your results are actually lower than projections...and in the event that you do as well as you had initially hoped, you'll just make more money than you expected.
Let me give you a real-life example to better illustrate ROI. There is a company who was promoting seminars where they would attempt to sell a service that cost $8,000. When they were starting to do advertising to promote these seminars, the question of how much budget should they allot came up. They wanted to start filling seminars with about a week after starting advertising, so they decided that fax broadcasting would be the best way for them to quickly get the message out about the seminars. Faxing can be done for as little as 7˘ per page in some major metropolitan areas, so they came back and said they thought they would want to send out about 25,000 faxes a week for the 5 weeks they would be doing seminars. When asked how many sales were they planning on generating, they said because of a unique financing plan that allowed them to sell their package on a low monthly payment basis, they thought they could sell at least 100 packages in that 5 week time period.
Well, 100 packages is a lot, and they were told that they would have to do at least 100,000 faxes a week for the 5-week period to get the number of leads required to sell that many packages. The man got his calculator out and did some quick math and realized that he had to spend $35,000! 7˘ times 100,000 faxes times 5 weeks! That number--$35,000--sounded so huge, it caught him off guard. His idea was to spend just under 2 grand a week, or a total of less than $9,000. Big difference. That's called "sticker shock."
So what he did was figure out the ROI, according to the steps previously explained. Again, first, figure out your gross profit per sale. His was about $3,250. Second, figure out the closing ratio. He thought his would be about 20%. So then, how many sales would he need to break even on a $35,000 advertising expenditure? Well, 35 thousand divided by $3,250 gross profit per sale is about 11 sales. Just 11 sales to break even. So if his closing ratio was just 10%, he'd have to generate about 110 leads to break even. 110 leads on 500,000 faxes?
Easily attainable. The last thing to do would be to figure out how many leads he'd have to get to reach his goal. His goal is 100 sales, and his closing ratio is 10%. That means he'd have to generate about 1,000 leads. On 500,000 faxes sent out, that's like a two-one-thousandths of a percent response. That is very reasonable. He'd generate a total gross profit on the deal of $325,000...and if you subtract out the $35,000 advertising cost, that's still a healthy gross profit. His attitude toward the $35 thousand changed instantly.
Well, do you see how that works now? Just run through your numbers and you'll know how much money is a lot of money when it comes to advertising.
Rich Harshaw is the founder of the Monopolize Your Marketplace system and CEO of Y2Marketing Business Marketing Strategies
This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news
Create Your Dynamic Elevator Speech
So, what's an elevator speech, and how do you get one?What Is It?An elevator speech is a short (15-30 second, 150 word) sound bite that succinctly and memorably introduces you. It spotlights your uniqueness.
Top Design and Marketing Tips from a Branding Expert
This month, we wanted to share some general tips relating to your graphic design that we've come up with over the past year:Always include an address on your business card, even if you are operating a small business out of your home - it greatly increases your credibility and makes you look much more established! If you're concerned about privacy, a Post Office box is a great way to go. When signing up for a Post Office box, consider using a "Mailboxes" store instead of the Post Office - you'll get a street address instead of the typical "P.
Increase Business By Being Nice
I have been reading articles on increasing sales using search engine optimisation as well as writing them for a very long time and I have not seen many which point out the best way to increase sales.The answer is obvious yet often overlooked; you just have to be as good to your customers as you would expect any other site owner to treat you.
How To Track Your Advertising Like A Hawk
Tired of pouring endless money into advertising? Do you wonder which ads are "REALLY" working for the business you manage? Would you like a bullet-proof system for capturing the results from your advertising and marketing? Below are three concepts that will enable you to track your advertising and marketing like a hawk! Really, it's that simple!Developing a tracking system: As a business owner/executive/manager, you need an efficient way to record and evaluate the results from your advertising and marketing programs. To get started, you will need a "prospect card" which includes a list of ALL the places you advertise and market your company.
How to Write Great Headlines
According to experts, just changing the headline of an ad or sales letter has been known to dramatically improve the effectiveness of an ad or sales letter by up to 1700 percent! Yes, headlines are that powerful--and that important!An effective headline will do many things at once. It will attract the readers attention, convey benefits by appealing to the readers self-interest and it will set the stage for what is to come.
How to Breathe New Life into Your Advertising Campaign
If you haven't made many sales or perhaps none at all, don't be discouraged. Use this 10-point checklist to breathe new life into your advertising campaigns and improve your response rate.
Business Cards: Why Waste Valuable Space?
So many business people neglect this valuable asset that may be used for a multitude of messages.Don't fall for the trap of supplying a "scribbler" for others that virtually guarantees your card will be in the "round file" sooner rather than later.
The Only Bad Advertising Is No Advertising - Or Is It?
Depending on whom you ask, you will get told many "truths" about advertising. The question I have for you today is this - "Is the only bad advertising, no advertising?"Before we begin, it might help us to agree on what advertising is, so here's one definition:"Advertising is the non-personal communication of an individual's paid persuasive information regarding products, and or services via various media.
Yellow Pages Ads - Buying Secrets
Yellow Pages Ads - Buying SecretsOK- let's agree that many businesses can benefit greatly from Yellow Pages advertising. Let's also agree that few businesses enjoy paying for this "necessary evil".
Design Your Own Newspaper Ads
Many people in business lay-out (design) their own ads. That old adage "If It Is To Be It Is Up To Me" prevails.
Fax Broadcast Services Get Your Message to Millions
If your company is one of those innovative businesses that has taken advantage of new fax broadcasting technologies to get your message out, you've probably come to realize that the fax broadcasting services industry is ever-changing and new developments are coming out all the time.It's pretty much a full-time job just to manage a fax broadcast database of any size, not to mention keeping the related fax broadcasting software updated and operational.
Electronic Score Boards
Wide range of electronic Key venues around the globe has turned to Electronic score boards that not only look breathtaking from every angle and distance, but provide consistently reliable performance year in and year out.Different type of sports including athletics, track cycling, running events, street cycling and mountain bike, swimming, synchronized swimming, diving as well as inline skating, water polo, ball spots, motor sports, alpine skiing, cross country and biathlon are some of the areas where Electronic score boards perfect fits solutions for.
What To Do With Your Business Cards
Without a plan to distribute your cards, there's no need to print them in the first place.Many fall into the trap of thinking all the thinking about business cards is over once the order is placed.
Direct Mail Rules of Thumb
First and foremost - You should identify your target market. Target your direct marketing lists.
Many business organizations that needs to disseminate late-breaking information to a large number of people. Out door sign boards are the perfect solution for them that command the attention of all who pass underneath.
Non-profit Coupon Books and Coupon Mailers for Small Businesses
Many groups like the Chamber of Commerce, ASB at the local high school, etc. will ask if their members can get a discount if they shop in your store or use your service.
How To Make Your Yellow Page Ads Work
I hear it often, "advertising in the Yellow Pages directory doesn't work!" I smile knowingly and wait for a pause in the conversation, and this is what I say in response to their claims?"It's not the medium - it's the message?and it's probable the market too!" Blank stares often accompany that opening statement. But they do work - and they work well? IF you know how to use them.
Direct Mail = Your Money, From Printer to Mailbox to Trash!
I did a quick, very unscientific survey of 25 of my friends. I asked them to put the mail that they do not open or read in a specific trash bag.
Whats The Frequency?
The more things change, some say, the more things stay the same. When it comes to marketing, I tend to agree.
Custom T-shirts -- Put Your Company Logo on Cotton!
An effective way to gain company recognition is to order custom t-shirts with your company name, logo, phone number, and other important information on them. You can use customized apparel to outfit your employees as well as to contribute a sense of professionalism and reliability to your company.
|home | site map|