How To Tell If An Advertisement Costs Too Much

Writen by Rich Harshaw

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

A Lesson In Advertising From The Eighteenth Century

Writen by Patrick Quinn

Back in the 1760s, the great Dr Samuel Johnson delivered himself of the dictum that 'promise, large promise is the soul of advertising'. It's a good thought, a great thought; and I contend that what was true then is equally true today. But it seems to me that modern advertisers are tying themselves into unnecessary knots in an attempt to reach audiences which they believe are becoming increasingly indifferent to their blandishments.

Well, yes, markets are turning deaf ears and blind eyes, but they always have done, though not for the reasons generally espoused by the world's marketers. I am convinced that despite all the sophisticated research and marketing effort that goes into advertising these days, the real reason that markets are indifferent to advertising is because much of it ignores the many splendoured principle that people don't buy products, they buy the benefits of owning those products.

Today, the great proportion of advertisers don't deliver sales messages, they tell what they hope are emotive stories with which the market can empathise, then they drop the product in as an afterthought, hoping that enough emotional cross-communication has been achieved for people to reach for their credit cards. That it doesn't and people won't has resulted in huge advertising budget cut-backs in the developed world in recent years. Only a manufacturer who has taken leave of his senses will throw even more money at a strategy that doesn't work.

The strategy responsible operates under the title Emotional Sales Proposition (ESP), thought in some quarters to be an advance on the Unique Sales Proposition (USP) which, on the contrary, does actually work. What has been overlooked or, more likely, ignored, is that in developing the principle of the USP in the late 1950s, the brilliant Rosser Reeves was striving to replace an advertising strategy that had been in situ for 30 or so years and was fast running out of steam. What was the device he was hoping to supersede? Well, by any other name, it was the emotional sales proposition. I won't bore you with the detail, but if you'd like to find out more, you should lay your hands on Reeves' book, Reality in Advertising (MacGibbon & Kee – 1961). It could be an eye-opener.

So, it's true – the one thing we learn from history is that we never learn anything from history. Let's go back to Dr Johnson. It's worth remembering that the kind of advertising old Sam was talking about in the 18th century was fairly innocuous and largely unexceptionable. It could be read in coffee- house flyers, in chapbooks and in rudimentary newspapers; and it consisted of sales messages as diverse as where to get your wig powdered and the date of the next public hanging at Tyburn. Even so, the products and services on offer were as important to the people of the time as mobile phones and computers are to us.

In the human condition, nothing much changes. Our egos still need to be massaged and we are all in hot pursuit of happiness. Only our methods for achieving these goals, only our technologies, vary with time.

So the next time you are tempted to commit advertising, think about Sam Johnson and give your market a reason for owning your product. A good reason.

About The Author

Patrick Quinn is an award winning copywriter with 40 years' experience of the advertising business in London, Miami, Dublin and Edinburgh. He publishes a FREE monthly newsletter, AdBriefing. Subscriptions are available at: http://www.adbriefing.com

Generate Millions Of Advertising Impressions And Drive Your Business Forward

Writen by Tim McCarthy

What does your vehicle say about your business? You drive to work, commute through traffic, stop at the shop for refreshments, park up outside your business, take care of deliveries and run some errands during the day, finally, you drive home in the evening. How many people did you pass or meet today? All potential customers, but did they notice you?

Grab a significant advertising advantage over your competitors by covering your vehicle with your business image or message in the form of an eye-catching digitally printed self adhesive vinyl advertisement known as a vehicle wrap and take it for a drive around town to promote your business.

Vehicle wrapping is now being recognized as an extremely cost effective and unique form of outdoor media for all sizes of businesses and company promotions. Many companies are finding out that vehicle advertising wraps and full colour fleet and car graphics are a great way to reach new and existing customers. Compared to other forms of media, wraps are extremely cost effective and generate millions of impressions each year.

An innovative method of advertising a business by creating a moving billboard on a vehicle, vehicle wraps provide companies with a method of advertising on cars in three dimensional form, providing an extremely high retention rate among those who see the vehicle. Vehicle wrap advertising uses semi-permanent graphics that can be removed without harm to the vehicle if desired. It is typically used on vans, but also on cars, trucks, fleet vehicles, buses, trains and even aircraft, in fact anything on wheels or that has an exterior shell.

Many customers with vehicle wraps take advantage of their advertising in areas that normally would be very expensive. Booking advertising at such venues as trade shows, sports events, concerts and grand openings may need to be done well in advance and rates may be very expensive, this is ideal for your wrapped vehicle, simply drive around or park at a conspicuous location. Another advantage of this type of advertising is it is not like print, radio, or television. It cannot be switched off and the channel cannot be changed.

There is no standard price for advertising wraps which are normally installed by specialist signage companies, It depends on a number of factors including the total number of vehicles to be wrapped, how much printing is involved, how much vinyl material is required per wrap, designer time, how many installers will be involved and how long it takes to fit, All that becomes the basis for pricing a project.

Wrapping a vehicle is a sophisticated process of being able to print on vinyl films and perfectly cover the vehicle with that advertisement. A good wrap must be able to cover, but not hinder window visibility and all materials must be weather resistant to heat, UV, cold and wind. Good adherence to the vehicle body is important, as the wrap must stay on without it peeling off before purposely being removed. The process involves cutting edge software, durable printing inks, high performance adhesive vinyl materials and laminates. It begins with an accurate engineering drawing known as a template which is taken from the vehicle, the advertisement is placed on the template on a computer, this is printed on large vinyl decals which are then fitted properly into a seamless image by professional installers.

If the company doesn't want to invest in vehicle wrap advertising, it can place advertising on vehicles in the form of magnetic signs, bumper stickers, window decals, etc. Companies seeking to attract business with a different format have found advertising on vehicles using these methods to be effective, without having to go the full vehicle wraps direction.

Vehicle wraps are like giant billboards, only more imaginative, they move in the area your company services and they create a visibly striking presence. They work all day, generating awareness for your company and are constantly reaching new and potential customers. Vehicle advertising is the best and most cost effective form of advertising available.

(c) Copyright 2005, Tim McCarthy. All rights reserved.

D-Signs, Tralee, County Kerry, Ireland
Signs, Printing and Display