How To Tell If An Ad Costs Too Much - Part 2
Yesterday we were talking about how to determine if an ad costs too much. Here's more:
Now this may all sound kind of complicated, but it's actually really simple. We calculated in yesterday's example that if $1,000 in ads can generate 80 leads, you would break even. That's a return on investment of 0. Your goal is probably more than to just break even - right? You're 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. Hey 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? Yup, 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. I.e. 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.
1. What's your gross profit per sale?
2. What's your closing ratio?
3. What's your break even...in terms of number of sales needed?
4. How many leads does your ad need to generate enough sales to break even?
5. What's your ROI on any given number of leads that you generate?
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 leads your ads end up generating. That's a good piece of 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 like in the example we just went through? Well, is that the only time that customer will ever buy anything from you? Hopefully not. How many times does that average customer come back in the course of a month, or a year?
If your average customer buys from 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 bucks 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!
More Monday.
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How To Tell If An Ad Costs Too Much (Part 2) - Adult B2B Marketing Tip
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