How To Tell If An Ad 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 is going to cost them. It's pretty easy to get sticker shock when you see that an ad in a popular industry publication costs thousands. It's easy to automatically think that's a lot of money. But, here's an 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. Think about it this way: if you were charged even as much as $40,000 for an ad 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 crazy 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 big companies can afford to spend three million bucks for a thirty second TV commercial during the Super Bowl? They 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 need 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. Easy enough to figure out your gross profit. Second, figure out what your closing or conversion 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.
Third, figure out what your break-even is. Do this by taking the cost of the advertisement divided 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 cost? 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 (or visitors in the case of a site) you need to generate from the ad if you are to break even. To do this, you need to know your closing or conversion ratio, which we also just figured out. 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 means that your $1,000 worth of advertising needs to generate 80 leads to break even.
More on this subject tomorrow.
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How To Tell If An Ad Costs Too Much - Adult B2B Marketing Tip
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