The True Cost of Your Advertising

If you are doing any sort of advertising then each month, year or whenever it’s time for the next campaign, you are faced with a choice: continue with what you were doing, increase your advertising, or decrease/cut your advertising. When it comes to reducing costs, most people naturally focus on the actual cost of the thing, but you don’t cancel your phone service simply because your telecom costs are too high. You might consider a reduced service plan, but not without taking into account exactly how that might negatively affect your business, right?

Advertising is no different. The goal of marketing is to get responses and ultimately sales. So you cannot look at your advertising costs outside of the context of: (1) What your current advertising produces in terms of responses and sales, and (2) What the potential negative effects of reducing that advertising would be.

Most people decide to cut advertising because they believe or perceive that it’s not working. Assuming that’s not the case with you, here’s how to make the most from your advertising dollars.

Let’s imagine that business has taken a downturn, so you’ve decided to increase your advertising. If you’re going to spend more money on advertising, the increase must justify its cost by producing better results. This means that the basis for measuring the cost of your advertising must never be cost per month. Instead, it must be a results-oriented measurement, such as cost-per-sale and return on investment.

Return on Investment (ROI)

The first factor you must consider for any type of advertising is Return on Investment – will my return exceed its cost?

Advertiser A pays $25 a month for a bold listing in the Yellow Pages and gets an average response rate of about 3 people a month. Since he closes an average of 1 out of 3 calls, his advertising results in 1 sale a month. His average sale is $100, so by deducting the $25 cost of his advertising we see he’s made $75 from his bold listing.

Advertiser B has a Yellow Page display ad for which he pays $150 a month. Advertiser B also closes 1 out of 3 calls, with an average sale of $100. But the monthly response rate from his larger ad is 30 people, resulting in 10 sales. So when we deduct his monthly advertising cost from $1,000 in sales, he makes $850 a month.

Since both are getting a positive return on their investment, each adverting program could be considered a success. But would it surprise you to know that, although Advertiser A’s cost per month is less than B’s, his advertising is actually more expensive? Here’s why:

Cost-Per-Sale (CPS)

We said that Advertiser A’s bold listing results in 1 sale a month. This means that the cost-per-sale is $25. (One sale a month, for which he pays $25 a month.)

Advertiser B, however, is receiving 10 sales a month, for which he pays $150, so his cost-per-sale is only $15. Although both are getting a positive return on their investment, Advertiser A’s ad is more expensive, because he’s paying $10 more per sale than Advertiser B, even though he’s paying less per month. Make sense?

Remember: Cost-per-Sale and Return on Investment are the true measurement of what your advertising costing you – not cost per month!

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