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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 Mon. January / 27 / 2020

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Put government on notice about advertising rules - Opinion  Wilkes-Barre Citizens Voice

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Given The Cost, Does Super Bowl Advertising Make Sense?  Forbes

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Yes, Mr. Peanut Is Dead. But Old-School Advertising Is Even Deader  Inc.

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Richard Edelman, Annie Leibovitz among 2020 Advertising Hall of Fame inductees  AdAge.com

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Why VIZIO Is Getting Into The Advertising Business  Forbes

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Advertising Tech for Audiovisual Media, Brand Marketing Priorities According to Portada's New Survey  Yahoo Finance

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How YouTube shields advertisers (not viewers) from harmful videos  Quartz

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Advertising Executives Changing The Conversation About Diversity In The Office  Cheddar

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Advertisers see early promise in TikTok’s self-serve ad platform  Digiday

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City of Newport working to approve an advertising and promotion commission  KAIT

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How Advertising Technology Will Cement Streaming's Dominance Over Cable  Motley Fool

Super Bowl advertisers embrace diversity ... cautiously - AdAge.com
Super Bowl advertisers embrace diversity ... cautiously  AdAge.com

LSU's championship run earned $200 million in free advertising for the university - WBRZ
LSU's championship run earned $200 million in free advertising for the university  WBRZ

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Out of Home Advertising Association of America Launches Biweekly News Service  MarTech Series

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SPONSORED ADVERTISING by Philippines Department of Tourism  FOX 11 Los Angeles

Advertising As We Know It Is Dead - Forbes
Advertising As We Know It Is Dead  Forbes

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The latest YouTube brand safety ‘crisis’ shows advertisers are taking a more nuanced approach  Digiday

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Alcohol Trends and Super Bowl Political Advertising  Harvard Business Review

LSU's Playoff run results in $200 million advertising exposure - 247Sports
LSU's Playoff run results in $200 million advertising exposure  247Sports

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Yellow cab industry bashes proposal to let Uber and Lyft cars have rooftop advertising  Crain's New York Business

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AAF Memphis recognizes Ehrlich's advertising career  The Daily Memphian

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Is the Viral Non-Ad Ad the Future of Advertising?  The New York Times

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Your Digital Detox May Be Toxic for Advertising  The New York Times

Programmatic Advertising Is Driving Rapid Growth in Mobile Video - eMarketer
Programmatic Advertising Is Driving Rapid Growth in Mobile Video  eMarketer

AT&T's Advertising Company Xandr Launches Dynamic Pause Ads - The Fast Mode
AT&T's Advertising Company Xandr Launches Dynamic Pause Ads  The Fast Mode

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A New Audience-Based TV Advertising Tool, From Ampersand  Radio & Television Business Report

NBCUniversal Exec Touts Peacock Advertising Ambitions - Hollywood Reporter
NBCUniversal Exec Touts Peacock Advertising Ambitions  Hollywood Reporter

Netflix Needs Advertising Plus Subscriptions, Investor Says - Barron's
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Making The Most Of This Year's Advertising Budgets: 15 Expert Tips - Forbes
Making The Most Of This Year's Advertising Budgets: 15 Expert Tips  Forbes

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Gojek and The Trade Desk Launch Advertising Partnership in Indonesia  Yahoo Finance

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Attracting Advertisers To Big Tentpole Telecasts, And Counterprogramming  Radio & Television Business Report

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TWRA warns of scam website advertising TN fishing license  WKRN News 2

YouTube overhauls advertising, data collection on kids content - The Washington Post
YouTube overhauls advertising, data collection on kids content  The Washington Post

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City Council, TLC talk merits of inside/outside advertising on for-hire vehicles  amNY

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Can Dialogue Advertising Eliminate Much of Digital Ad Fraud?  AiThority

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Super Bowl Preview: The Why and When of Big Game Advertising  SHOOT Online

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Why Audio Ads Should Be a Part of Your Advertising Strategy in 2020  MarTech Series

Amazon's Expanding Its Video-Advertising Business - The Motley Fool
Amazon's Expanding Its Video-Advertising Business  The Motley Fool

Lamar Advertising Company Prices Private Offering of Senior Notes - Yahoo Finance
Lamar Advertising Company Prices Private Offering of Senior Notes  Yahoo Finance

Inside the Biggest 2020 Advertising War Against Trump - The New York Times
Inside the Biggest 2020 Advertising War Against Trump  The New York Times

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Inscape Says Big Brand Advertisers Need To Take The Rudder For Addressable To Succeed  TVRev

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Advertising Market to Witness Promising Growth Opportunities during– 2020-2025 | Deployment Model, Growth Factors, Regional Trends, Key Players Analysis, Product Demand etc.  Melanian News

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Direct-response advertisers report some early success with Snapchat’s dynamic ads  Digiday

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Advertising industry steering clear of political fray  Greater Baton Rouge Business Report

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Microsoft Advertising launches sweepstakes for advertisers  Search Engine Land

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US justice officials set to meet and coordinate on Google probe  South China Morning Post

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Top Advertisers, Media Platforms Get Tough on Harmful Online Content  Adweek

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CES Proves Advertising’s Future Will be Shaped by Manufacturers  Broadcasting & Cable

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Radio Advertising: Dead or Alive?  Radio & Television Business Report

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Comscore Television Viewing Data Helps Predict Advertising Audience Decline  MarTech Series

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Bloomberg: TikTok owner seeks US CEO to potentially oversee app's advertising  Mobile Marketer

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Proposed digital advertising tax bad for business | COMMENTARY  Baltimore Sun

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B2B Paid Advertising in 2020 with Greg Finn [PODCAST]  Search Engine Journal

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Fox adds commercial time to Super Bowl to accommodate more advertisers  AdAge.com

Podcast Advertising Trend Predictions For 2020 - Forbes
Podcast Advertising Trend Predictions For 2020  Forbes

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Some Super Bowl advertisers concerned Trump, Bloomberg ads could steal their thunder  CNBC

Facebook Revises Rules On Political Advertising - NPR
Facebook Revises Rules On Political Advertising  NPR

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Young's debuts “Masters of Fish” advertising campaign  SeafoodSource

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Study: Tinder, Grindr And Other Apps Share Sensitive Personal Data With Advertisers  NPR

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Female-targeted advertising, UW-Madison drinking culture factors in high female alcohol death rates  WKOW

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Advertisers sit tight as the Grammys strikes a sour note  AdAge.com

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Super Bowl 2020: the ins and outs of the big game's advertisers  The Drum

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Spotify to suspend political ads in 2020 - AdAge.com
Spotify to suspend political ads in 2020  AdAge.com

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Opinion Is advertising's very strange future real?  The Drum

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TikTok explores curated content feed to lure advertisers  Financial Times

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Google cutting web cookies, ending lucrative tracking tool for advertisers  Yahoo Finance

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