Most people want to get a better return out of advertising!!

How Much Should I Spend on Advertising?

Ideally, the answer is zero! You should invest, not spend money on advertising. Every pound invested into advertising should return multiples to your bottom line. More times than not; when I ask a business owner to tell me their advertising return on investment (ROI) they shrug their shoulders and say “I don’t know”. Through proper testing and measuring protocols you will be able to know your ROI, not only for your advertising budget, but also for each ad placed.

A customer acquisition investment

Think about advertising this way. Advertising is a way to purchase customers! As such, if you are making wise purchases, the price that you are paying for each customer, on average, will return to you at least enough profit pounds to cover the cost of the ad. That is your breakeven point. Therefore, the ROI for your advertising budget is zero – nothing to brag about! However, if you know your advertising ROI, no matter what it is, you are ahead of most businesses; because you are now in a position to improve. If you aren’t measuring, how can you know if your ROI is increasing or decreasing?

I’ve been told that “our advertising is too complicated to figure its return”. No longer! By implementing these four steps you will know your advertising ROI:

  1. Structure your ad campaign so that you can trace each inquiry that it generates
  2. Tabulate the number of inquiries generated from each campaign
  3. Tabulate the sales generated
  4. Calculate your ROI

Tracing inquiry origins

There are numerous ways to trace inquiry data, such as:

  • Have an offer associated with the ad that is unique to that ad – “Mention this ad and receive a free…..” (I don’t recommend discounting because that is too damaging to your bottom line. Offer an item or service that has value to the prospect but zero or low cost to you.)
  • Have a call to action in your ad with a phone number that is unique to that ad. Online virtual receptionists provide the ability to have numerous phone numbers, at low cost, while tabulating the quantity and actual call-in numbers.
  • Run an integrated marketing campaign using a Personalized URL (PURL). This method combines direct marketing with a personalized web site containing a questionnaire designed to drive serious prospects to you. The marketing metrics are automatically reported.
  • Another way is to train your sales staff to ask and tabulate how each inquiry learned about your business. This method works if you have a very limited advertising campaign, such as only having one ad in the phone book rather than numerous ads in different publications.

Valuable but insufficient information

Even though gathering this data is a step beyond most businesses, it is necessary but insufficient information to determine your advertising ROI. Remember, we are measuring the amount of profit generated by each customer that we purchase through the advertising campaign, then calculating our advertising ROI. By tabulating the number of inquiries generated by the ad, we have only progressed partially toward our goal.

Now we must know how many of those inquiries are converted into sales – our conversion rate. Here is an interesting fact. Some ads might produce more inquiries than another, but provide fewer conversions to a sale because of the type of prospects the ad attracts! Tracking each inquiry through the sale gives us our conversion rate and moves us closer to being able to calculate our advertising ROI.

What is the average lifelong value of your customers?

The final metric needed is the average lifelong value of our customers. Here is where a decision must be made regarding what metrics you use to finalize the data needed to determine your advertising ROI. Are the majority of your repeat purchases originating from the ad that initially attracted them, or must the majority of your repeat purchasers be attracted again by more advertising? Most businesses fit the former scenario. Therefore, the lifetime value of that customer can be included in your ROI calculation, usually 3 – 5 years, depending upon your industry.

Now it’s time to calculate your advertising ROI

With this data, the ROI calculation is fairly simple. Figure the average lifetime pound sale value and multiply that by your profit margin. Multiply that by the number of inquiries generated by the advertising campaign, times your conversion rate for that campaign and you have your profit produced by that campaign. Divide that by your investment into that campaign and you have your ROI. Mathematically it looks like this: (ALV x PM x # I x CR)/ £ Invested = ROI

Years ago, gathering this volume of data was a daunting task – no longer! There are numerous data base management systems available specifically designed for acquiring and reporting customer acquisition information. These customer relationship management (CRM) programs are available as licensed software or as online subscription, and are tailored for specific industries.

One Response

  1. Great post, such a well explained perception into advertising and how business owners should think and structure a campaign. This will come as a great help to many of the people I meet.

    Many Thanks