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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 Wed. February / 21 / 2024

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Consent Mode V2: Google Shares Shares Key Details For Advertisers  Search Engine Journal

What Vizio can do for Walmart's digital advertising business - Yahoo Finance
  1. What Vizio can do for Walmart's digital advertising business  Yahoo Finance
  2. Walmart to buy TV maker Vizio for $2.3 billion to expand advertising  The Washington Post
  3. Walmart Acquires Smart TV Firm Vizio For $2.3B, Altering Streaming Ad Landscape  Deadline

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Strong earnings and an online advertising play by Walmart have us wondering about Costco  CNBC

NYT plans to debut new generative AI ad tools later this year - Axios
NYT plans to debut new generative AI ad tools later this year  Axios

Advertising's new creative King kaun: Can Tanmay Bhat be the next Piyush Pandey? - Storyboard18
Advertising's new creative King kaun: Can Tanmay Bhat be the next Piyush Pandey?  Storyboard18

Chicago Cubs Appear Poised to Add Sleeve Advertisement - Uni Watch
Chicago Cubs Appear Poised to Add Sleeve Advertisement  Uni Watch

Six Critical Business Challenges The Privacy Sandbox Must Address - AdExchanger
Six Critical Business Challenges The Privacy Sandbox Must Address  AdExchanger

X's surge in traffic for advertisers is fake, report claims - Search Engine Land
X's surge in traffic for advertisers is fake, report claims  Search Engine Land

Ad tech company makes case for journalism - Semafor
Ad tech company makes case for journalism  Semafor

What Jason Kelce's spicy TikTok ad for Frank's RedHot says about pop culture advertising - Fast Company
What Jason Kelce's spicy TikTok ad for Frank's RedHot says about pop culture advertising  Fast Company

INVIDI Technologies and Tata Play Revolutionize Television Advertising Landscape in India with Launch of Data ... - Yahoo Finance
INVIDI Technologies and Tata Play Revolutionize Television Advertising Landscape in India with Launch of Data ...  Yahoo Finance

5 Advertising Companies in Singapore to Know - Built In
5 Advertising Companies in Singapore to Know  Built In

Walmart Is Doubling Down on Video Advertising With a $2.3 Billion Acquisition of Vizio - Inc.
Walmart Is Doubling Down on Video Advertising With a $2.3 Billion Acquisition of Vizio  Inc.

Advertising MVPs - News - Missouri State News
Advertising MVPs - News  Missouri State News

Walmart’s $2.3 billion purchase of TV maker Vizio isn’t about TV sales, it’s about advertising - Fortune
Walmart’s $2.3 billion purchase of TV maker Vizio isn’t about TV sales, it’s about advertising  Fortune

Nexstar Media appoints Dan Lanzano as senior vice president, national advertising sales - Editor And Publisher Magazine
Nexstar Media appoints Dan Lanzano as senior vice president, national advertising sales  Editor And Publisher Magazine

Walmart eyes advertising growth with acquisition of Vizio smart-TV biz - Fast Company
Walmart eyes advertising growth with acquisition of Vizio smart-TV biz  Fast Company

INVIDI Technologies and Tata Play Revolutionize Television Advertising Landscape in India with Launch of Data ... - The Bakersfield Californian
INVIDI Technologies and Tata Play Revolutionize Television Advertising Landscape in India with Launch of Data ...  The Bakersfield Californian

Walmart CEO says the big-box retailer is well-positioned to grow its advertising business - CNBC
Walmart CEO says the big-box retailer is well-positioned to grow its advertising business  CNBC

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Legislative And Litigation Trends In Environmental Advertising  Law360

Lamar Advertising to appear at the Morgan Stanley Technology, Media and Telecom Conference - EIN News
Lamar Advertising to appear at the Morgan Stanley Technology, Media and Telecom Conference  EIN News

Walmart to buy TV maker Vizio for $2.3 billion to expand advertising - The Boston Globe
Walmart to buy TV maker Vizio for $2.3 billion to expand advertising  The Boston Globe

What makes Super Bowl advertising the MVP of the ad world? An MSU expert weighs in - KSMU Radio
What makes Super Bowl advertising the MVP of the ad world? An MSU expert weighs in  KSMU Radio

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Out There 360 Taps Talon to Unlock Full Potential of OOH Advertising for Luxury Brands in North America  MediaVillage

Local Classified Advertising - The Falmouth Outlook
Local Classified Advertising  The Falmouth Outlook

Forecast: AI's Rise Will Cut Search Engine Traffic, Affecting Advertising - Inc.
Forecast: AI's Rise Will Cut Search Engine Traffic, Affecting Advertising  Inc.

Why Walmart-Vizio deal could be 'new nexus' for advertising - Yahoo Finance
Why Walmart-Vizio deal could be 'new nexus' for advertising  Yahoo Finance

The evolving healthcare advertising landscape - PMLiVE
The evolving healthcare advertising landscape  PMLiVE

Walmart-Vizio: How the Deal Impacts the Advertising Ecosystem - Portada-online.com
Walmart-Vizio: How the Deal Impacts the Advertising Ecosystem  Portada-online.com

Shaping the Future of TV Advertising: Mike Dean's Visionary Leadership as Ampersand's New President (Video) - MediaVillage
Shaping the Future of TV Advertising: Mike Dean's Visionary Leadership as Ampersand's New President (Video)  MediaVillage

almart to buy Vizio for $2.3B, expanding advertising platform to connected TV - StreamTV Insider
almart to buy Vizio for $2.3B, expanding advertising platform to connected TV  StreamTV Insider

Why Walmart is buying Vizio - CNN
Why Walmart is buying Vizio  CNN

The high risk, high reward game of advertising on WhatsApp | News - Campaign Asia
The high risk, high reward game of advertising on WhatsApp | News  Campaign Asia

Why brands should advertise during high news cycles without fear - Fast Company
Why brands should advertise during high news cycles without fear  Fast Company

Kentucky Statewide Classified Advertising - The Falmouth Outlook
Kentucky Statewide Classified Advertising  The Falmouth Outlook

Walmart Takes on Roku With $2.3B Deal to Buy TV Maker Vizio - Hollywood Reporter
Walmart Takes on Roku With $2.3B Deal to Buy TV Maker Vizio  Hollywood Reporter

ASU-SBDC hosts virtual 'Fundamentals of Advertising' event - MyFoxZone.com KIDY
ASU-SBDC hosts virtual 'Fundamentals of Advertising' event  MyFoxZone.com KIDY

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The Out-of-Home Advertising Recovery Has Not Been Equal  Adweek

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BlackRock Launches New Bitcoin Advertising Campaign for Legacy Finance  BTC Times

How antitrust cases against tech giants could reshape the digital advertising landscape - TNW
How antitrust cases against tech giants could reshape the digital advertising landscape  TNW

Walmart buys Vizio: A new OS, more advertising on your Walmart TV? - Android Authority
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Out There 360 Taps Talon to Unlock Full Potential of OOH Advertising for Luxury Brands in North America  Little Black Book - LBBonline

Walmart Acquiring Smart TV Maker Vizio for $2.3 Billion to Bulk Up Advertising Business - Variety
Walmart Acquiring Smart TV Maker Vizio for $2.3 Billion to Bulk Up Advertising Business  Variety

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$1.2 Million in Free Advertising From Jacksonville Marketing Agency for Small Businesses  News Channel Nebraska

Walmart to acquire smart TV maker Vizio for $2.3 billion in bid to boost its advertising business - ABC News
Walmart to acquire smart TV maker Vizio for $2.3 billion in bid to boost its advertising business  ABC News

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The Impact of Blockchain Technology on Marketing and Advertising  MarTech Series

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What's NEXT 2024: How to leverage AI in a cookieless advertising era - MARKETECH APAC  MARKETECH APAC

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Miami advertising startup plans to map the bay through USF partnership - Tampa Bay Business Journal  The Business Journals

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Walmart Buys TV Maker Vizio to Bolster Its Advertising Reach  PCMag UK

Advertising revolution: Inside Walmart's bid for Vizio - CTech
Advertising revolution: Inside Walmart's bid for Vizio  CTech

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AI solutions for digital advertisers to boost campaign efficacy in Europe  The Drum

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How Generative AI Is Changing the Advertising Industry  Adweek

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Flamengo pitchside advertising deal expands Brax's footprint  SportBusiness

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Italian watchdog fines BAT and Amazon over misleading advertising - Reuters
Italian watchdog fines BAT and Amazon over misleading advertising  Reuters

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Walmart isn't buying Vizio for its hardware. It wants the TV maker's ad business  Fast Company

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BlackRock launches a Bitcoin advertising campaign! A crypto revolution!  Cointribune EN

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Global Meta advertising revenue 2023  Statista

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Walmart Acquires Vizio for $2.3 Billion, Aims to Dominate Connected TV Advertising Market  BNN Breaking

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Looking back, looking forward: Aditya Kanthy, Omnicom Advertising Services | News  Campaign Asia

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Advertising  Insider Financial

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The Trade Desk CEO Rips Google's Privacy Sandbox  Business Insider

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Meta Encourages Advertisers to Ditch iPhone in Latest Spat With Apple  The Wall Street Journal

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TelevisaUnivision Tops 7M Streaming Subs, Posts Ad Revenue Gain, Takes $1B Impairment Charge  Hollywood Reporter

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How AI is transforming the business of advertising  Financial Times

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Why Advertising Directors Are Dying to Work With the Budweiser Clydesdales  The Wall Street Journal

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Google to repay advertisers with credits after overcharging glitch  Ad Age

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The big winner at the Baftas? Advertising  CampaignLive

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UK advertising announces blockbuster SXSW 2024 programme  PoliticsHome

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Meta, Apple are squabbling again over advertisers - MarketWatch
Meta, Apple are squabbling again over advertisers  MarketWatch

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PR-110-2023 12/20/2023 - FDIC
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U.S. Podcast Advertising Revenue Study 2023: Drivers, Strategies, and Tactics for Growth  IAB

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Starbucks Should End 'Deceptive' Advertising, Lawsuit Says  Newsweek

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Meta Touts New Way for Small Advertisers to Avoid Apple's Fees  Bloomberg

Advertising & Public Relations Degree | Grady - Grady College
Advertising & Public Relations Degree | Grady  Grady College

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