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How To Tell If An Advertisement 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 in certain markets is going to cost them. It is pretty easy to get sticker shock when you see that a sixty-second radio commercial on a popular Los Angeles station could cost you a thousand bucks. Each. Or when you realize that all the "Dot.com" businesses in Silicon Valley have made radio spots on top stations in the San Francisco market cost as much as $2,500. A Minute. Or when you realize that a newspaper ad in your city barely bigger than a Hershey Bar will cost a couple thousand dollars. It's easy to automatically think that's a lot of money. Now here's the 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. if you were charged even as much as $40,000 for a sixty-second radio commercial 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 a fool 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 that these big companies can afford to spend a million and a half dollars for a thirty second TV commercial during the Super Bowl? The 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've got 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. Step two is to figure out what your closing 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.

Now, figure out what your break-even is. Do this by taking cost of the advertisement and divide it 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 costs? 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 you need to generate from the ad if you are to break even. To do this, you've got to know your closing ratio, which we just figured out also. 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 indicates that your $1,000 worth of advertising needs to generate 80 leads to break even.

Now I know that all sounds kind of complicated, but it's actually pretty simple. We just calculated in the example that if the $1,000 ads can generate 80 leads, you would break even. That's a return on investment of 0. I'm not saying that your goal is to break even. I realize that you are 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. 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? That's right, 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. In other words, 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.

What's your gross profit per sale?
What's your closing ratio?
What's your break even...in terms of number of sales needed?
How many leads does your ad need to generate for enough sales to break even?
What's your return on investment on any given number of leads that you generate?

Now 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 ever leads your ads end up generating. That's a good piece of information to have, but now I want to 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? Is that the only time that customer will ever buy anything from you? How many times does that average customer come back in the course of a month, or a year?

If your average customer shops with 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 dollars 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!

Now, a couple of words of advice when figuring your return on investment for advertising. First, always estimate your numbers conservatively--or in other words, on the low side. Always figure on getting a lower number of leads than you're hoping for and expecting. Always count on a lower closing ratio than you're used to. If you calculate your numbers using conservative figures, then you'll do fine if your results are actually lower than projections...and in the event that you do as well as you had initially hoped, you'll just make more money than you expected.

Let me give you a real-life example to better illustrate ROI. There is a company who was promoting seminars where they would attempt to sell a service that cost $8,000. When they were starting to do advertising to promote these seminars, the question of how much budget should they allot came up. They wanted to start filling seminars with about a week after starting advertising, so they decided that fax broadcasting would be the best way for them to quickly get the message out about the seminars. Faxing can be done for as little as 7¢ per page in some major metropolitan areas, so they came back and said they thought they would want to send out about 25,000 faxes a week for the 5 weeks they would be doing seminars. When asked how many sales were they planning on generating, they said because of a unique financing plan that allowed them to sell their package on a low monthly payment basis, they thought they could sell at least 100 packages in that 5 week time period.

Well, 100 packages is a lot, and they were told that they would have to do at least 100,000 faxes a week for the 5-week period to get the number of leads required to sell that many packages. The man got his calculator out and did some quick math and realized that he had to spend $35,000! 7¢ times 100,000 faxes times 5 weeks! That number--$35,000--sounded so huge, it caught him off guard. His idea was to spend just under 2 grand a week, or a total of less than $9,000. Big difference. That's called "sticker shock."

So what he did was figure out the ROI, according to the steps previously explained. Again, first, figure out your gross profit per sale. His was about $3,250. Second, figure out the closing ratio. He thought his would be about 20%. So then, how many sales would he need to break even on a $35,000 advertising expenditure? Well, 35 thousand divided by $3,250 gross profit per sale is about 11 sales. Just 11 sales to break even. So if his closing ratio was just 10%, he'd have to generate about 110 leads to break even. 110 leads on 500,000 faxes?

Easily attainable. The last thing to do would be to figure out how many leads he'd have to get to reach his goal. His goal is 100 sales, and his closing ratio is 10%. That means he'd have to generate about 1,000 leads. On 500,000 faxes sent out, that's like a two-one-thousandths of a percent response. That is very reasonable. He'd generate a total gross profit on the deal of $325,000...and if you subtract out the $35,000 advertising cost, that's still a healthy gross profit. His attitude toward the $35 thousand changed instantly.

Well, do you see how that works now? Just run through your numbers and you'll know how much money is a lot of money when it comes to advertising.

Rich Harshaw is the founder of the Monopolize Your Marketplace system and CEO of Y2Marketing Business Marketing Strategies


Todays News by officejax free advertising and ad exchange solutionsMORE RESOURCES updated Tue. March / 19 / 2024

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Ahead of IPO, Reddit blends advertising into user posts  The Register

Thanks to generative AI, advertising's business models will be reinvented - Fast Company
Thanks to generative AI, advertising's business models will be reinvented  Fast Company

Judge Throws Out Sephora Clean Beauty False Advertising Lawsuit - The Business of Fashion
Judge Throws Out Sephora Clean Beauty False Advertising Lawsuit  The Business of Fashion

Kristen Cavallo Retires From Advertising After 30 Years in the Industry - Adweek
Kristen Cavallo Retires From Advertising After 30 Years in the Industry  Adweek

Kristen Cavallo retires from advertising for political activism - Ad Age
Kristen Cavallo retires from advertising for political activism  Ad Age

While advertisers are playing it cool, they're hesitant to unleash their budgets on TikTok - Digiday
While advertisers are playing it cool, they're hesitant to unleash their budgets on TikTok  Digiday

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Fox recalled for Iwo Jima service, advertising agency, TV show  Cleveland Jewish News

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Tesla flexes Model Y achievements with Cybertruck in rolling advertisement  TESLARATI

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National CineMedia 4Q Profit Rises After Increase In Advertisers  MarketWatch

Food Advertising Bill Advances To Assembly | News, Sports, Jobs - Evening Observer
Food Advertising Bill Advances To Assembly | News, Sports, Jobs  Evening Observer

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Podcast Industry in 2024: Top Platforms, Audience Stats, & Ad Trends  eMarketer

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Radio Advertising Feeds Fast Food Restaurant Success  Radio Ink

Electronic Advertising Provisions Become Law in VA - Brewers Association
Electronic Advertising Provisions Become Law in VA  Brewers Association

National columnist examines CFPB reverse mortgage advertising data - HousingWire
National columnist examines CFPB reverse mortgage advertising data  HousingWire

Radio And QSR Consumers Mirror Each Other. But There's An Advertising Mismatch. - Insideradio.com
Radio And QSR Consumers Mirror Each Other. But There's An Advertising Mismatch.  Insideradio.com

Advertise with Us - E&E News by POLITICO
Advertise with Us  E&E News by POLITICO

Advertising Sales Representative (Fargo) - KVLY
Advertising Sales Representative (Fargo)  KVLY

Jury finds man guilty of gun, drug offenses after advertising drugs for sale on social media - Abccolumbia.com
Jury finds man guilty of gun, drug offenses after advertising drugs for sale on social media  Abccolumbia.com

BMI Pays Tribute to Retiring CEO of the Radio Advertising Bureau - BMI, music
BMI Pays Tribute to Retiring CEO of the Radio Advertising Bureau  BMI, music

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OUT OF HOME ADVERTISING CONTINUES ON GROWTH TRAJECTORY, UP 2.1% IN 2023  PR Newswire

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CNN International Commercial elevates Sebastian Laver to lead content sales and advertising for Latin America  Editor And Publisher Magazine

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Advertising Could Gobble Up The Grocery Business  AdExchanger

Kristen Cavallo, MullenLowe Group’s global CEO to leave advertising - Storyboard18
Kristen Cavallo, MullenLowe Group’s global CEO to leave advertising  Storyboard18

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Can advertising tell the truth? This vodka brand is giving it a shot  The Drum

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Mobvista Achieves $1.05B in 2023 Revenue, Sees Significant Profit Increase  Yahoo Finance

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Top 15 Podcast Advertisers Spent Nearly $50M During Feb.  Insideradio.com

Lamar Advertising Executives' Salaries and Bonuses Increase - TipRanks.com - TipRanks
Lamar Advertising Executives' Salaries and Bonuses Increase - TipRanks.com  TipRanks

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Is Townsquare Media Inc (TSQ) a Good Choice in Advertising Agencies Monday?  InvestorsObserver

National CineMedia, Inc. Announces New $100 Million Share Repurchase Program - Yahoo Finance
National CineMedia, Inc. Announces New $100 Million Share Repurchase Program  Yahoo Finance

What a TikTok Ban Would Mean for Advertisers - Bloomberg
What a TikTok Ban Would Mean for Advertisers  Bloomberg

Textured Hair Advertising Campaigns - Trend Hunter
Textured Hair Advertising Campaigns  Trend Hunter

We Are Social: what we saw at SXSW - More About Advertising
We Are Social: what we saw at SXSW  More About Advertising

Learning from the (Advertising) Pros | BU Today - Boston University
Learning from the (Advertising) Pros | BU Today  Boston University

Europe’s AI Act Nudges Advertisers Toward Responsible Generative AI Use - AdExchanger
Europe’s AI Act Nudges Advertisers Toward Responsible Generative AI Use  AdExchanger

Microsoft Advertising testing new interface similar to Google Ads - Search Engine Land
Microsoft Advertising testing new interface similar to Google Ads  Search Engine Land

Court Tosses Out False Ad Case Over Sephora's "Clean" Line - The Fashion Law
Court Tosses Out False Ad Case Over Sephora's "Clean" Line  The Fashion Law

Team Internet Group swoops for online advertising specialist in $41m deal By Proactive Investors - Investing.com UK
Team Internet Group swoops for online advertising specialist in $41m deal By Proactive Investors  Investing.com UK

EU introduces new rules on transparency and targeting of political advertising - Présidence française du Conseil de l'Union européenne 2022
EU introduces new rules on transparency and targeting of political advertising  Présidence française du Conseil de l'Union européenne 2022

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Advertising salary guide—why design jobs are in demand  Ad Age

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Identity Is Paramount For Paramount: Scoles Offers Advertisers Real Audiences – Beet.TV  BeetTV

Adalytics report exposes the intricacies of made-for-advertising sites - Digiday
Adalytics report exposes the intricacies of made-for-advertising sites  Digiday

What Would a TikTok Ban or Sale Mean for Advertisers? - Adweek
What Would a TikTok Ban or Sale Mean for Advertisers?  Adweek

National CineMedia, Inc. Reports Results for Fiscal Fourth Quarter and Full Year 2023 - Yahoo Finance
National CineMedia, Inc. Reports Results for Fiscal Fourth Quarter and Full Year 2023  Yahoo Finance

GenAI in Advertising - EMARKETER
GenAI in Advertising  EMARKETER

3 big reasons to be optimistic about advertising in 2024, survey reveals - The Drum
3 big reasons to be optimistic about advertising in 2024, survey reveals  The Drum

Ayurvedic company in India banned from advertising certain products : Goats and Soda - NPR
Ayurvedic company in India banned from advertising certain products : Goats and Soda  NPR

Amazon apologizes after its AI advertising system makes costly error - Search Engine Land
Amazon apologizes after its AI advertising system makes costly error  Search Engine Land

Gen AI Will Impact Media And Advertising In Multiple Ways, Experts Say. - Insideradio.com
Gen AI Will Impact Media And Advertising In Multiple Ways, Experts Say.  Insideradio.com

Elections 2024: Political advertisers supercharge TV News AdEx growth; to grow by over 85 percent - Storyboard18
Elections 2024: Political advertisers supercharge TV News AdEx growth; to grow by over 85 percent  Storyboard18

Gazette wins top news, advertising honors from Wisconsin Newspaper Association - The Janesville Gazette
Gazette wins top news, advertising honors from Wisconsin Newspaper Association  The Janesville Gazette

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Over Rs. 100 crore spent on political ads on Google, BJP leads the advertising chart  Storyboard18

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ADWEEK Names Ryan Joe Editor in Chief  Adweek

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A weary advertising spend canary in a slow start to the year  AdNews

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Lamar Advertising (NASDAQ:LAMR) Shares Purchased by Sunbelt Securities Inc.  Defense World

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Free TV says further gambling advertising restrictions would significantly impact revenue  AdNews

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Social Security: How we protect you from misleading advertising and communications  Terre Haute Tribune Star

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Paid advertisement: Vote 'yes,' Citizens for Strong Fort Schools - FortAtkinsonOnline.com  Fort Atkinson Online

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Microsoft shows another Bing popup advertisement to Windows users  Ghacks

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The Willy Wonka experience's generative AI debacle is just the start of our nightmarish new advertising reality  Fast Company

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Columbia man found guilty after advertising drugs on social media  WIS News 10

Brands unknowingly wasting dollars on Made for Advertising sites - Search Engine Land
Brands unknowingly wasting dollars on Made for Advertising sites  Search Engine Land

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Why I won't apologise for working in advertising  Creative Review

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US oil production hits record levels under Biden  Vox.com

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Goodbye Lady In Red: Massive Illegal West End Avenue Building Advertisement Comes Down  westsiderag.com

Advertise - exploreClarion
Advertise  exploreClarion

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DCPS begins re-advertising for superintendent position as search drags on  Yahoo! Voices

Amazon Says It Sold Ads for Products Shoppers Couldn't Buy - Bloomberg
Amazon Says It Sold Ads for Products Shoppers Couldn't Buy  Bloomberg

Paper v pixels: Making a sustainable advertising choice - The Media Leader
Paper v pixels: Making a sustainable advertising choice  The Media Leader

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‘Sneaky’ social media ads are luring young into gambling, say campaigners  The Guardian

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Leading advertisers believe in the ‘Cricket on TV advantage’ with IPL set to begin  ETBrandEquity

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Egg freezing: 41 percent of clinics could be breaching advertising guidelines • PET  BioNews

TikTok advertisers will look to rivals if US Senate moves ahead on ban - Reuters
TikTok advertisers will look to rivals if US Senate moves ahead on ban  Reuters

MediaLink-UTA dispute signals end of an era for advertising excess - Campaign US
MediaLink-UTA dispute signals end of an era for advertising excess  Campaign US

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Jivox Announces IQ DaVinci For Direct Advertising: A Single Workflow To Launch Campaigns On Multiple Retail Media ...  PR Web

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Van Geest: City of Ottawa must stop accepting fossil-fuel advertising — now  Ottawa Citizen

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IAB: Adapting To Consumer Data Limitations, Advertisers Are Turning To First-Party Options.  Insideradio.com

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Anomaly wins global brief to ‘supercharge’ Tonies audio platform  More About Advertising

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Britannia and Mindshare roll out AI-powered camera campaign for NutriChoice featuring Ranveer Singh  Storyboard18

FCC has new rule requiring cable and satellite TV providers to disclose all hidden fees in advertising - KMVT
FCC has new rule requiring cable and satellite TV providers to disclose all hidden fees in advertising  KMVT

A US TikTok ban could fuel Meta's advertising dominance—but Google and YouTube stand to benefit as well - EMARKETER
A US TikTok ban could fuel Meta's advertising dominance—but Google and YouTube stand to benefit as well  EMARKETER

CBS Sports Ad Chief John Bogusz to Step Down (EXCLUSIVE) - Variety
CBS Sports Ad Chief John Bogusz to Step Down (EXCLUSIVE)  Variety

SDSU student advertising team receives top honors at American Advertising Awards - SDSU Athletics
SDSU student advertising team receives top honors at American Advertising Awards  SDSU Athletics

Patanjali advertising case: SC asks Ramdev to appear in person, stock down 3.5% - Moneycontrol
Patanjali advertising case: SC asks Ramdev to appear in person, stock down 3.5%  Moneycontrol

Patanjali advertising case: SC asks Ramdev, Balkrishna to appear before it - BusinessLine
Patanjali advertising case: SC asks Ramdev, Balkrishna to appear before it  BusinessLine

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Patanjali Misleading ads case: Supreme Court asks Baba Ramdev to be present in court - The Hindu
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How the TikTok ban threat is affecting advertisers and creators  Ad Age

Patanjali misleading advertisement case: SC asks Baba Ramdev to be personally present for next hearing - The Economic Times
Patanjali misleading advertisement case: SC asks Baba Ramdev to be personally present for next hearing  The Economic Times

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The Shift's Sam Baker: How to make your own media (and conquer advertisers' menopause fear)  Media Makers Meet

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Pitt State Graphics and Communications students win big in elite advertising competition  Pittsburg State University

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Lamar Advertising (NASDAQ:LAMR) Sees Significant Drop in Short Interest  Defense World

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