We would like to
thank the local libraries, schools, and universities for recommending students
to visit us when doing research on any of our information topics.
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
ADVERTISING RELATED ARTICLES:
Is Your Yellow Pages Ad Putting Cash in Your Pocket... or Sucking Cash Out?
Any idea? It's a question that more than a few Yellow Page advertisers ponder. If you are currently spending money every month to run an ad in your local directory, you don't want to wrestle with that question.
Classified Ads That Get Results
Classified ads do not have the big market appeal that a full color display ad has, but they are still one of the most economical ways to get your business into the public eye. And, because classifieds do not demand expensive eye-catching designs or ingenious wording that you often see in direct-mail campaigns, they are a perfect marketing avenue for even new entrepreneurs.
The unnecessary and extensive use of female models in advertisements is common not only in America & Europe, but also in Pakistan and rest of the world. Women are used to sell everything from cars to cigarettes.
Push vs Pull Advertising
Push vs. Pull Advertising - Understand the Consequences for your Product or ServiceYou will save yourself a considerable amount of time and money if you first determine your product's (or service's) suitability for "pull" and "push" advertising.
A Quick And Easy Way Of Getting More Customers From Every Single Ad You Write... Guaranteed!
FACT: Most people don't spend anywhere near enough time on creating a strong, compelling headline.Which is why many copywriting experts.
How to Make Your Claims Believable
When you hear claims like??Best Lawnmower in the country?Absolute Lowest Prices In Existence?Leaves your hair cleaner than any other shampoo?do you believe them?Or is there a certain degree of doubt in your mind about their credibility? Or whether they are 'hyped up'?Think about it. Everybody expects advertisers to exaggerate their claims.
Does Your Brochure Pass the Test - Or is It Headed for the Trash? Part One
The decision on whether or not someone will read your brochure is usually decided in the first 5 seconds they look at it. What kind of message are you communicating in that five seconds? Will you make a favorable impression with your prospect? Will you move your prospect closer to the sale? There are really only two key elements that will determine how well your brochure is received by prospects.
I Don't Want to be Different
To succeed in today's crowded marketplace where most of the products and advertising look exactly the same, a small business owner must stand out, shouting above the din with a message so clear and compelling that prospects stop and take notice. It's a matter of business survival.
16 Methods for Getting Free Advertising
1. Place copies of your circular on bulletin boards throughout your community, such as in coin-operated laundries, grocery stores, barber shops, etc.
How to Write Ads that Increase Your Business
I caught myself wracking my brain over what kind of article I should write for newspapers that would be useful to business people. It struck me that I was making a solid effort to get into the mind of my target market.
Advertising on a Budget -- Part 3: Frequency, Frequency, Frequency
This is the third article of a three-part series. I'm illustrating the marketing challenges of PrescottWeddings.
The Power of...
You certainly must know that Many Big Marketers consider COPYWRITING to be the most important skill you need to be earning online. There's a lot of good copywriting around.
15 Tips for Better Yellow Page Ads
Yellow Pages advertising is one of the most popular forms of advertising in the country today. Almost every home in America (96.
In Advertising Bigger isn't Always Better
If you have been following the recent advertising news you will notice that more and more major advertisers are looking to smaller ad agencies to handle their campaigns.Is it because they feel bad? Is it because they are cheaper? Or is it because they see the level of creative talent of smaller agencies? Lets take a quick look at why this is happening and how this is good for the consumers and the advertisers.
The Secrets of High Money Classified Ads
When used effectively, classified ads can be one of the quickest and most inexpensive ways to increase your sales. A well written classified ad can generate thousands in sales, yet could cost you pennies to write and run.
Small Cards, Big Ideas: Alternative Uses for Business Cards
Aggressive business card marketing isn't about handing your business cards out to everyone you see.The card itself must have a new use, an innovative design, or something other than the usual contact information printed on it.
9 Tips for Better Billboards
It is a given that billboard advertising "outdoor" is not a "quick fix". If sales are down, you can't quickly put up a few boards to boost the numbers.
Scrolling LED signs
Scrolling LED signs is type of LED signs that displays Scrolling text and can be used as outdoor and/or indoor outlet. Wide variety of businesses uses this equipment to spread news and other information quickly and efficiently.
Should You Advertise on TV?
When people discover my background in advertising, the questions flow. One of the most frequent questions is "Should I advertise on TV?"I can't answer that questions until I ask a number of questions first.
Advertise Where Its Forbidden To
The most common way to drive people to your business site is advertising. You cannot succeed without advertising, this is a fact.
Find used office equipment in Ohio at www.OfficeJax.Has.It
Find the best fleamarkets at www.FleaMarketWorld.Has.It
Find electric powered vehicles at www.NoGas.Drives.It
Find homes for rent
Jim (James) Baughman Hosting Company of Akron, Ohio offers the finest in the CLOUD internet hosting service and solutions at affordable prices. The Hepsia control panel is a superior control panel unlike the old school cpanel you may be familiar with as well as downloadable daily backups, 24 hour tech support response time is less than 30 minutes, php version selection, unlimited bandwidth, are all included at no additional cost.
advertising agency advertising supply and services marketing and advertising internet advertising pay per click advertising newspaper advertising promotion online advertising free advertising business marketing and advertising promotional advertising specialty print advertising banner advertising agency promotional product advertising radio advertising company classified advertising web advertising outdoor advertising ppc advertising advertising agency and services local advertising art layout production service advertising direct internet marketing advertising web site advertising business advertising television advertising jobs advertising services restaurant advertising yellow page advertising agency tv advertising web banner advertising directory advertising services advertising slogan advertising photographer adsense advertising adwords apis cashing billboard advertising advertising balloon pay per click banner advertising gambling online magazine advertising yahoo advertising email advertising free internet advertising internet online marketing advertising business search engine advertising direct mail advertising services advertising design advertising age creative advertising targeted advertising advertising campaign media advertising career free online advertising mobile advertising ogilvy vintage advertising pen internet advertising agency car advertising subliminal advertising idea advertising and marketing employment cheap advertising pen advertising space online advertising company advertising sign career in advertising direct mail advertising small business advertising history of advertising internet marketing online advertising advertising card communication content integrated marketing perspective premium promotion internet banner advertising advertising outdoor billboard affiliate advertising advertising art advertising display advertising product advertising copy advertising affiliate program free web site advertising real estate advertising brand advertising advertising brand communication guerrilla unconventional advertising business internet online internet marketing promotion advertising advertising firm contemporary advertising coroplast akron ohio custom signs and advertising solutions at OfficeJax online flea market