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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
Latest News:Site: Yahoo! News Search Results for news Game news: 'GTA IV' hits 10 million, EA meets ESPN (AP via Yahoo! News) Real news from the virtual world: News and notes on the PGA Tour's top 20 golfers (USA Today) Get the latest news and notes on the top 20 golfers on the PGA Tour. These rankings are based 2006-07 PGA Tour results. UAL shares walloped by new posting of old news (Reuters via Yahoo! News) A nearly 6-year-old news story on the 2002 bankruptcy filing of UAL Corp resurfaced on the Internet on Monday, clobbering the airline's shares briefly as some traders mistook the report as current and plausible news. Asyncast delivers custom news to hands-free mobile devices (CNET) The company's Rocketron service allows users to set preferences for the kinds of news stories they want to hear, as well as filter controls for news they don't want. Young adults want less election news (UPI) EVANSTON, Ill., Sept. 8 (UPI) -- U.S. young adults say there is too much election-related news on Internet news sites, a university study indicates. CNET News Daily Podcast: The new Zune plays its tune (CNET) Microsoft lets "slip" Zune news one day before Apple's big shindig. Big ad group says Google-Yahoo is a bad idea. Who says real spies don't dig social networking? Game News: 'GTA IV' Hits 10 Million, EA Meets ESPN (CBS News) Real news from the virtual world: ABC News gets first Palin interview (Reuters via Yahoo! News) ABC News' Charles Gibson has snagged the first interview with Alaska Gov. Sarah Palin since she was named the GOP's vice presidential pick on August 29. United Airlines hit by 5-year-old news (UPI) CHICAGO, Sept. 8 (UPI) -- United Airline's stock value plunged Monday after a 5-year-old news story was posted on a Florida newspaper's Web site. UPI NewsTrack Entertainment News (UPI) Spears wins 3 MTV Video Music Awards ... 'Wrestler' wins Golden Lion in Venice ... Report: MSNBC shuffles election anchors ... Iconic Astroland park closes ... News from United Press International. Site: news - Google News Palm Shares Soar As New Smartphone Wins Wall Street Praise - CNNMoney.com
MORE RESOURCES: Site: Yahoo! News Search Results for advertising Ad-averse Mobile Users Will Pay to Avoid Advertising (Cellular-News.com) Mobile providers looking to boost their revenues through content downloads and advertising are in for a rough ride, according to a new study by market researchers TNS. A Web advertising dark horse goes on the offensive (Market Watch) While its rivals have been fetching multibillion-dollar acquisition offers from the likes of Google Inc. and Microsoft Corp., online-advertising firm ValueClick Inc. has been busy digging its way out of a legal mess. Intergi's Video Game & Entertainment Advertising Network Has Largest Potential Reach in U.S. According to Newest ... (Centre Daily Times) Intergi (www.intergi.com), a leading video game and entertainment site representation company and advertising network, today announced that it now has a total potential advertising reach of 52.4 million unique visitors in the United States, topping other targeted ad networks - including bellwethers such as Advertising.com Games and Yahoo! Games. Based on the latest data from the August 2008 ... Largest ever advertising billboard at London Bridge Station (London SE1) A huge advertising billboard has been unveiled at London Bridge Station to promote the NSPCC and brighten up hoardings on the concourse. Online Brokerage Sites See Increased Visitors With Ramped up Online Advertising Efforts (PR Newswire via Yahoo! Finance) comScore, Inc. , a leader in measuring the digital world, today released a study of the online trading and brokerage industry showing strong visitor growth to online brokerage sites coinciding with heavy online advertising efforts by several of the key brokerages. Advertising spend in Qatar crawls (MENAFN) Advertising spend in Qatar crawls Intergi's Video Game & Entertainment Advertising Network Has Largest Potential Reach in U.S. According to Newest ... (Business Wire via Yahoo! Finance) DEERFIELD BEACH, Fla.----Intergi , a leading video game and entertainment site representation company and advertising network, today announced that it now has a total potential advertising reach of 52.4 million unique visitors in the United States, topping other targeted ad networks - including bellwethers such as Advertising.com Games and Yahoo! GCC advertising expenditure rises by 23.6% (MENAFN) GCC advertising expenditure rises by 23.6% NeoMedia and Format Dynamics Join Forces to Integrate Innovations in Online & Offline Advertising (Marketwire via Yahoo! Finance) NeoMedia Technologies, Inc. (OTC.BB: NEOM), and Format Dynamics, Inc., today announced a strategic alliance designed to accelerate innovation in both online and offline advertising. Bald Is Beautiful (Advertising Space) (CBS News) New Zealand's national airline is offering to pay bald travelers to use their heads - literally - in a new advertising campaign. Site: advertising - Google News SMU to launch graduate advertising program - Bizjournals.com
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