Volume I - Edition IV
IS your Advertising Cost to High
As a business consultant I hear it all the time “Advertising costs too much, the
results are unpredictable – I’ll just rely on my good name.” While having a good
name in business is critical, this does not bring in new clients at a rate that
sustains most businesses. Advertising is necessary, but it need not break the
bank.
We have all heard the price tags for a 30-second ad during the Supper Bowl—over
a million dollars! A radio ad in strong markets, such as LA or San Francisco
average about $2500 for a 60-second spot. An ad run here in the local area is
between $800 and $1200 depending on the frequency rate and time slots. Newspaper
advertising can run several hundreds of dollars to a few thousand depending on
size and frequency of the ad. It’s no wonder why small business people feel that
“advertising costs too much.” However, I would like to challenge the basic
premises that advertising costs too much – and replace that thought with how
much you should spend on your advertising.
Remember, the goal of all advertising is to generate sales and sale leads. If
your business is retail of products, your advertising will have a different cost
factor than a service-based business. This is because of the way products and
services are sold. Product sales are typically quick turn and stock items, while
services usually have a longer sales cycle and require more time with the
prospect. So the advertising messages as well as the call to action are
different.
The real issue is not the cost of an advertisement, but the return on the
investment. For example, you decide that you want to do a direct-mail campaign
to 4000 local residents. The finished cost is about $1.50 each for a total
campaign cost of $6000. The expected hit rate is 2% per thousand pieces, or in
this case about 80 potential clients. If your sales conversion rate is 75% (the
number of prospects to sales made) you have 60 new customers. If the product or
service is priced at $100 you made no money, but gained 60 customers. However,
if you product or service is priced at $250 your campaign resulted in $15,000 in
revenue, or a 60% return on investment. Not bad at all. Now, was this too
expensive?
Large-and-medium sized companies that have advertising budgets know the expected
return for each and every traditional form of advertising, weather it be TV,
radio, magazine, newspaper or trade rag. Other forms of advertising are much
harder to predict and are often only used to generate name or brand recognition
such as billboard or banner advertising; as a small business owner you should
never spend advertising money that is not directly related to capturing new
clients.
The general idea is, work in reverse – determine how much money you will make
before you decide if this advertising is too expensive. There are as many models
for determining the return on investment (ROI) as there are forms of
advertising, but the simplest works well for most situations.
First, know your profit per sale. While this might sound straightforward, there
are a few left turns. You have items you purchase for resale or consumption on
the job. An item that costs you one dollar and you sell for two dollars has a
gross profit of one dollar or 100%. If you run a service-based business you need
to work from a different gross margin – the cost of goods consumed for the job,
and hourly overhead cost. For example, if you are a photographer and you
photograph weddings your cost would include; film, processing, proof book, and
time spent shooting the wedding and processing the order.
Remember, Gross Profit does not include overhead or business operating expenses
as part of the calculation.
Second, know what your conversion rate is. If you sell to three people for every
five that inquire your conversion rate is 60%. If you sell to two out of every
five that inquire, your conversion rate is 40%.
Now realize something important here. In this exercise, we’ve just figured 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 leads your ads end up
generating. That’s good information to have, but now let’s 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 — is that the
only time that customer will ever buy anything from you? Let’s hope not! How
many times does that average customer come back in the course of a year? If your
average customer shops with you once a quarter and you make $150 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 $150 a quarter
client is worth a tidy $1800. So now how much would you be willing to spend on
marketing and advertising to capture that client?
What if those were your average numbers, $150 a quarter for 3 years. Then in the
earlier example, remember where we broke even with 60 sales? Now those 60
customers would be worth an astounding $36,000 over the next three years. And it
only cost you a $6000 in advertising. Now your break-even point looks a lot
better doesn’t it? If you could accrue a $36,000 income every time you invest
$6000 in advertising – all things being equal – I’d tell you to mortgage your
house and spend as much money as possible on advertising!
A couple of words of advice when figuring your return on investment for
advertising. Always estimate your numbers conservatively – 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.
This month's tip:
Author, C.J. Hayden, suggests that whenever you find yourself hesitant or fearful about marketing because of what people might say to you, consider these six countermeasures to help you keep going.
- Be less self critical and focus on your "fan mail."
- Don't take a client's refusal to mean there is something wrong with you.
- When a prospect does not get back to you in a timely manner, they may be too busy - not because they do not like your style.
- You do not need to be perfect - just deliver the message that you will get the job done.
- Get out there and do the work - with practice you will eventually be great at what you do.
- "The path to success is by taking consistent action in pursuit of your goals even when doubts creep in."
Quote of the Month:
"If you're trying to achieve, there will be roadblocks. I've had
them; everybody has had them. But obstacles don't have to stop
you. If you run into a wall, don't turn around and give up.
Figure out how to climb it, go through it, or work around it."
Michael Jordan