What is My Advertising Return on Investment
What is my advertising return on investment?
'You need to spend a dollar to make a dollar.' We've all heard the saying and most importantly we don't mind spending a dollar if we know we definitely will make two dollars. Businesses recognise they need to invest money in marketing and advertising and that if done wisely they will be better off.
The question is however, what am I willing to risk and what is my potential return on investment?
Risk is simple to understand - it's your investment (the dollars you will spend on advertising) weighed up against the minimum sales you need to recover from that investment.
Return on Investment is a bit more complex. When we think about return on investment we tend to confine our thinking to immediate known sales, or 'direct response'. With advertising there is so much more value than just measurable direct sales.
Here are a few other benefits to advertising:
Branding It's the reason Nike can charge $300 for a pair of shoes. Branding is the foundation to your business and protects your price. It sustains you in the hard times as prospects seek out value and trust.
Online recognition When we search online we are presented with an index of possible businesses to choose from, people click on businesses' names they recognise. Your print, radio and TV advertising improves your online results because you are a recognisable entity.
Web traffic Today many of your print, TV and radio adverts send the prospect to the website. The website is your engagement and conversion tool. If you are not tracking day to day traffic you'll miss identifying this benefit.
Database Are you using your advertising or website to grow your email database? Being able to engage with interested parties on an ongoing basis is a very powerful way of generating direct sales and building your brand.
In advertising we talk about direct response being the tip of the iceberg. It is what we can identify - what we can't see is what's under the surface.
So let's talk about direct response.
High product value
This is an easy one. Let's say you're selling a product for $5,000, $10,000 or $30,000. A customer buys the product once and you make a margin. Typically, it is easy to say I need to sell 1, 2 or 5 per year for example to justify my spending. Equally, it is easy to quantify that I need to make two sales in the year to get my money back.
With this, your risk is quantified at two sales. If you make more, your return on investment is less and you have lost money.
Low product value
Here it gets a little tricky. Consider a beauty or hair salon with a typical sale having a value of $120. One way of quantifying the risk is to say I am spending $600, so I need to make at least 5 sales to break even.
I believe this is not the right way to quantify the risk or the return on investment. Let's say the cost of treating that client is $20 and hence the gross margin (after removing variable costs) is $100. Let's also say this client comes back every 4 weeks or 13 times a year. The value of this client is 13 times $100 - so $1300. This is the money you will make, over a year, after removing your variable costs. It depends on you doing a good job and retaining that client due to your service, not your discounting.
If we look at return on investment through these glasses, you can see you in fact only need to bring in one new loyal client a month to be well ahead. Your risk is less than one new client a month. If we were to introduce the notion of this client referring a friend then the return becomes even greater and you are on your way to a sustainable, highly profitable business.
So the moral of the story is to understand the risk vs. the return on investment equation for your business. Knowing this may allow you to grow your business even faster.