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Feel Like Your Can't Afford Print?

Published:
19/10/2017
Author:
Steve Indersmith

“I can’t afford to advertise”

If I had a dollar for every time I heard this! The other common cry is, “I thought I’d give it a go because it’s cheap.” My view? There is no such thing as cheap if it gets no results.

In a past newsletter, we talked about first focusing on the strategy - Why advertise? What do I want to achieve? Where will I advertise? How will I advertise? Now, let’s delve into the question of whether you can afford to advertise. I believe even the smallest of businesses can afford significant advertising if they achieve results and calculate the return on their advertising spend correctly. So, let’s look at this question through the eyes of a café owner - can they afford a monthly advertising spend of $600?

The wrong approach
There are several versions of this conversation. “For every coffee I sell, I net 50 cents return, so I would have to sell 1200 coffees every month to break even,” or “After all my costs are considered, my nett profit is only 8%, so I would need to trade $7500 a month to pay for my advertisement (8% of $7500 is $600).” Viewed this way, it is no wonder the café owner cannot afford to advertise… but is it the truth?

The right approach
To grow a business, we need to grow sales and one of the best ways of doing this is to find and then nurture loyal customers. Every great service business relies on return customers. Our café owner’s business is built on loyal clients that come due to the great coffee, tasty food and a friendly banter. So, let’s review the numbers through the prism of what a loyal client is worth but, before we do this, we must understand the concept of gross margin.

Gross margin
The definition of gross margin is the sales revenue minus the costs of goods sold (COGS). It only considers the variable costs associated with the goods not the fixed costs. Variable costs are such things as the cost of the coffee, milk and the raw or supplied food items.

The gross margin does not usually include the cost of labour as this is a fixed cost. Our café owner would incur the cost of the barista whether they made a coffee or not. The same goes for such things as rent, insurance and many of the other overheads a business incurs. It is true some things such as electricity should be included. If I don’t run the machine, I don’t incur the cost but the effect is so small we will ignore it in our example.

So now we are ready to look at the return from our loyal customer.

Loyal customer
In the café, a typical loyal client will purchase four to five days a week and buy a coffee and a sandwich or food item each visit. They’ll spend around $12 a visit. The cost of goods sold is around 25% of the price so our gross margin is $9 a visit. Your business may be different, so do the maths.

Let’s crunch the numbers

Industry Frequency of Purchase Visits Per Year Value Per Visit COGS Gross Margin (per visit) Gross Margin (per Year)
Cafe 4 times per week (48wks of the year) 192 $12 25% $9 $1,728

So if my advert is able to attract one new customer and I wow that customer such that they become a loyal customer my business will be better off by $1728 per year!

Oops, hang on I forgot to factor in the $600 advert cost. That means I have $1128 per year that I would not have obtained without advertising and that’s only from attracting one new loyal customer. Do I think that is possible? ABSOLUTELY

What about their friend?
How many loyal customers do you see wandering in to cafes by them self? Not many, so we could reasonably expect to see this return doubled or even tripled!

Our friendly café owner can well afford to advertise and spend $600 on an advert. The issue that they may need to consider is one of cash flow as the cost is incurred in one month the revenue over one year.

How about your business? Can you afford to advertise?

Industry Frequency of Purchase Visits Per Year Value Per Visit COGS Gross Margin (per visit) Gross Margin (per year)
Beauty Salon Every 4 Weeks (48 weeks of the year) 12 $160 20% $128 $1,536
Hair Salon Every 6 Weeks (48 weeks of the year) 8 $140 20% $112 $896
Yoga Studio 2 Time per Week (48 weeks of the year) 96 $15 5% $14 $1,344
Restaurant Every 8 Weeks (48 weeks of the year) 6 $140 25% $105 $630

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