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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?
What's your closing ratio?
What's your break even...in terms of number of sales needed?
How many leads does your ad need to generate for enough sales to break even?
What's your return on investment on any given number of leads that you generate?

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


Todays News by officejax free advertising and ad exchange solutionsMORE RESOURCES updated Fri. September / 18 / 2020

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AcuityAds to Officially Launch New Advertising Automation Platform  MarTech Series

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The Future Of Advertising Is A Creative Leader On Top, Not MBAs Or Financial Executives  Forbes

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Roku, NBCUniversal In Stalemate Over Carriage Of App Platforms, Advertising Share 09/21/2020  MediaPost Communications

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Trump Has Lost His Edge In TV Advertising  FiveThirtyEight

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Dealership advertising rebounds after pandemic disruption  Auto Remarketing

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AI, Advertising & The Identity Era: IBM's Bachstein – Beet.TV  BeetTV

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Adventure Advertising purchases Crowning Touch Embroidery  PenBayPilot.com

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Advertising Outside Of Facebook  Benzinga

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TikTok Says Advertising Won’t Be Illegal Under Trump’s ‘Ban’  Adweek

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MOLOCO Cloud Enables Self-Serve Programmatic Advertising  Martechcube

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National Media Council Issues Circular Regarding Social Media Advertising  Lexology

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KERV Launches Lookbook Feature for Interactive Video Advertising  Martechcube

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(SPONSORED) Do's and Don'ts of Advertising  Radio Ink

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NBCU Intros News Outcome-Based Measurement Program; Telcos Spend Big On Advertising Despite The Pandemic  AdExchanger

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Pacvue Brings its Award Winning eCommerce Advertising and Intelligence Platform to Instacart  MarTech Series

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ReThinc adds public relations services to its marketing and advertising efforts  AZ Big Media

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NTN Buzztime Enters Asset Purchase Agreement to Sell Entertainment and Advertising Assets  PRNewswire

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COVID-19 Impact on Mobile Advertising Market 2020: Global Industry Size, Trends, Growth Insights, SWOT Analysis by Top Key Vendors and Forecast Research to 2025  The Daily Chronicle

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An Open Letter To The Advertising Community From Sound Lounge's Tom Jucarone  SHOOT Online

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Traditional Advertising Agency Services Market 2020- Current Scenario, Market Share, Future Opportunities Epsilon, Televerde, 360I etc.  The Daily Chronicle

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Social Media Advertising Market to Eyewitness Massive Growth by 2028: Alphabet, Facebook, Baidu  The Daily Chronicle

Social media companies urged to stop advertising to under 18s - Telegraph.co.uk
Social media companies urged to stop advertising to under 18s  Telegraph.co.uk

Media Central Delivers Substantial Revenue Growth from Enhanced Programmatic Advertising Efforts - Yahoo Finance
Media Central Delivers Substantial Revenue Growth from Enhanced Programmatic Advertising Efforts  Yahoo Finance

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Trump ramps up advertising in Maine, shifts focus to the economy  NewsCenterMaine.com WCSH-WLBZ

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Mobile Advertising Market Expected To Garner $243,703 Million by 2022, Growing at a CAGR of 15.8% From 2014 - - EIN News
Mobile Advertising Market Expected To Garner $243,703 Million by 2022, Growing at a CAGR of 15.8% From 2014 -  EIN News

ReverseAds Announces The Launch Of The World's First True Alternative To Search Advertising - PR Web
ReverseAds Announces The Launch Of The World's First True Alternative To Search Advertising  PR Web

AT&T considers cellphone plans subsidized by advertising - Fox Business
AT&T considers cellphone plans subsidized by advertising  Fox Business

NBCUniversal tests new measurement program to prove it can push product sales for advertisers - Digiday
NBCUniversal tests new measurement program to prove it can push product sales for advertisers  Digiday

Targeted TV advertising is losing steam, and industry players are scrambling to save it - Business Insider - Business Insider
Targeted TV advertising is losing steam, and industry players are scrambling to save it - Business Insider  Business Insider

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Digital Display Advertising Market 2020 In-Depth Analysis of Industry Share, Size, Growth Outlook up to 2025 | Starcom Worldwide, SocialHi5, SevenAtoms Inc, Digital Business Development Ltd, Search Engine People  The Daily Chronicle

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Direct-to-Consumer Pharmaceutical Advertising Market 2020 by New Technology, Size, Share and Top Players Analysis- HARVARD POLITICAL REVIEW, MDEDGE, FDA | Forecast 2026  The Daily Chronicle

Leveraging digital advertising during pandemic for quicker recovery - Automotive News
Leveraging digital advertising during pandemic for quicker recovery  Automotive News

Google exec on hot seat in Congress over advertising power - WSLS 10
Google exec on hot seat in Congress over advertising power  WSLS 10

Unlocking the “Five I's” of Omnichannel Advertising: Mediaocean's Neuhauser - BeetTV
Unlocking the “Five I's” of Omnichannel Advertising: Mediaocean's Neuhauser  BeetTV

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Display Advertising System Market Manufacturing Base Distribution, Sales Area, Product Types by Players (2020-2026)  The Daily Chronicle

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Mobile Advertising Market Research: Aim To Achieve The Pinnacle In Qualitative Industry Research And Business Intelligence  The Daily Chronicle

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Family Business Profile: 97-year-old Advertisers Printing makes big investments to power through Covid-19 pandemic  St. Louis Business Journal

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Aerial Advertising Market Next Big Thing | Major Giants Airsign, Van Wagner Aerial, Aerial Advertising  The Daily Chronicle

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Online Display Advertising Market: Indoor Applications Projected to be the Most Attractive Segment during 2020-2027  The Daily Chronicle

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Thanks To Our Advertisers  Above the Law

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Advertising MARKET 2020 | (COVID19) IMPACT ANALYSIS | BUSINESS OUTLOOK, GROWTH, REVENUE, TRENDS AND FORECASTS 2026  The Daily Chronicle

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(SPONSORED) Uplift Your Broadcast Advertising  Radio Ink

Color-Coded Maps Tell Marketers Where They Need To Increase Advertising 09/18/2020 - MediaPost Communications
Color-Coded Maps Tell Marketers Where They Need To Increase Advertising 09/18/2020  MediaPost Communications

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Programmatic Job Advertising Leader Joveo Hires Dwane Lay to Bolster Customer Success Leadership  MarTech Series

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Indian Law on advertisement of brand extensions of alcohol and tobacco products and how it poised to become tougher  Lexology

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For the advertising industry, the pandemic means opportunity.  The New York Times

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Digest: Court overturns SEPTA ban on political advertising  trains.com

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Biden vs Trump advertising strategy in battleground states  CNN

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Republican worries rise as Trump campaign pulls back from television advertising  The Washington Post

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How (and Why) to Use Branding to Supercharge Your Advertising  Business 2 Community

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The government is cutting back on coronavirus awareness advertising - here’s why  Shields Gazette

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Taboola And IAS Partner On Industry-First Brand Safety Solution For Performance Advertisers  MarTech Series

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How Walmart is advertising its new loyalty program, Walmart+  Digiday

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Facebook Says Apple’s New iPhone Update Will Disrupt Online Advertising  The Wall Street Journal

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Can This Relationship Be Saved? Big Tech and Big Advertisers Talk It Over.  The New York Times

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Facebook tries to head off election turmoil, angering both Trump and Democrats  The Washington Post

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Trump goes mostly dark in TV advertising fight with Biden  The Associated Press

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Post-IDFA Advice For Pubs: Work Directly With Your Advertisers  AdExchanger

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How outdoor advertising can deepen inequality  BBC News

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Village of South Rockwood advertisement for sealed bids  Sentinel-Standard

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Editorial: Villanueva is the best advertisement for muscular sheriff oversight  Los Angeles Times

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What Trump's TikTok Ban Could Mean For Advertisers  AdExchanger

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TikTok Launches Marketing Partner Program for Advertisers  Social Media Today

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Advertising agencies in the Wichita area - Wichita Business Journal  New York Business Journal

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Advertisement for Bids | Legal Announcements | oanow.com  Opelika Auburn News

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Google's advertisers will take the hit from UK digital service tax  The Guardian

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Supervisors Approve Wording Change in Confederate Statue Vote Advertisement  The Southside Messenger

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Advertise With Us  Mexico Ledger

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‘Contextual targeting is going to be the new black’: As IDFA restrictions loom, advertisers brace for the fallout  Digiday

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