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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 Mon. July / 22 / 2024

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Bar Council’s ‘cease and desist’ notice to online platforms on legal advertising raises questions  Hindustan Times

Microsoft Advertising introduces Performance Max brand lists - Search Engine Land
Microsoft Advertising introduces Performance Max brand lists  Search Engine Land

Netflix’s Advertising Business Is Boosting Profit Margins - AdExchanger
Netflix’s Advertising Business Is Boosting Profit Margins  AdExchanger

Netflix's Advertising Cloud Looms Larger - The Information
Netflix's Advertising Cloud Looms Larger  The Information

Netflix Adds 8 Million Subscribers, Touts Advertising Revenue - PYMNTS.com
Netflix Adds 8 Million Subscribers, Touts Advertising Revenue  PYMNTS.com

Why do Visa and Mastercard advertise to consumers? - The Guardian
Why do Visa and Mastercard advertise to consumers?  The Guardian

‘Free state’ signs are false advertising | Letters to the editor - South Florida Sun Sentinel
‘Free state’ signs are false advertising | Letters to the editor  South Florida Sun Sentinel

Netflix will sunset its cheapest advertising-free plan - Fortune
Netflix will sunset its cheapest advertising-free plan  Fortune

Boost Oxygen Ordered to Pay $413,000 for False Advertising relating to Recreational Oxygen - Santa Barbara Edhat
Boost Oxygen Ordered to Pay $413,000 for False Advertising relating to Recreational Oxygen  Santa Barbara Edhat

Adidas DROPS Bella Hadid from advertising campaign - Daily Mail
Adidas DROPS Bella Hadid from advertising campaign  Daily Mail

Adidas modifies controversial advertising campaign with Bella Hadid - Fashionnetwork USA
Adidas modifies controversial advertising campaign with Bella Hadid  Fashionnetwork USA

AI Briefing: Why eBay is adding more AI advertising tools for sellers - Digiday
AI Briefing: Why eBay is adding more AI advertising tools for sellers  Digiday

Can Netflix scale its advertising business? - Campaign Asia
Can Netflix scale its advertising business?  Campaign Asia

Remembering Brendan Conan Pereira: A Legacy in Advertising - MediaNews4U
Remembering Brendan Conan Pereira: A Legacy in Advertising  MediaNews4U

S.C. allots $1M for advertising of International African American Museum - WRDW
S.C. allots $1M for advertising of International African American Museum  WRDW

Amazon Advertising Portal Crashes, Disrupting Prime Day Sale - Yahoo Finance
Amazon Advertising Portal Crashes, Disrupting Prime Day Sale  Yahoo Finance

In-Game Advertising Market Growing at 11% CAGR to Hit USD 17.6 Billion by 2030 | Playwire LLC, RapidFire Inc., - EIN News
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Ad legend Brendan Conan Pereira passes away - ETBrandEquity
Ad legend Brendan Conan Pereira passes away  ETBrandEquity

The state of comedy in advertising and why absurdist humor is in - Ad Age
The state of comedy in advertising and why absurdist humor is in  Ad Age

Measuring Advertising Attentiveness; A Conversation With Bill Harvey - Forbes
Measuring Advertising Attentiveness; A Conversation With Bill Harvey  Forbes

Netflix Is Racing to Close Its Advertising ‘Gap,’ Co-CEO Greg Peters Says - Variety
Netflix Is Racing to Close Its Advertising ‘Gap,’ Co-CEO Greg Peters Says  Variety

AI in Advertising Research - Ipsos in Canada
AI in Advertising Research  Ipsos in Canada

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Advertising & Promotion for Medical Products Conference  Food and Drug Law Institute

NBCU Claims Growth in Upfront Advertising Sales - Next TV
NBCU Claims Growth in Upfront Advertising Sales  Next TV

TikTok Faces Challenges in Advertising Upfronts - The Information
TikTok Faces Challenges in Advertising Upfronts  The Information

AI and Google advertising: What’s next? - Search Engine Land
AI and Google advertising: What’s next?  Search Engine Land

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Exclusive: Biden campaign to resume advertising this week after Trump shooting  Reuters

The strategic advantage of disability-inclusive advertising - Campaign US
The strategic advantage of disability-inclusive advertising  Campaign US

Advertising icon Brendan Conan Pereira passes away at 96 - Adgully
Advertising icon Brendan Conan Pereira passes away at 96  Adgully

Can Netflix scale its advertising business? - Campaign India
Can Netflix scale its advertising business?  Campaign India

Netflix’s backroom work to make its advertising more attractive - AdNews
Netflix’s backroom work to make its advertising more attractive  AdNews

Opinion | It’s Time to Ban Pharmaceutical Advertising - The New York Times
Opinion | It’s Time to Ban Pharmaceutical Advertising  The New York Times

Taboola scores Apple advertising deal, shares surge - Reuters
Taboola scores Apple advertising deal, shares surge  Reuters

VIDEO: State allots $1 million in funding for IAAM advertising - WRDW
VIDEO: State allots $1 million in funding for IAAM advertising  WRDW

Ipsos launches AI advertising reaction tool - Research Live
Ipsos launches AI advertising reaction tool  Research Live

Amazon’s Prime Day advertising hiccup highlights the event’s importance - eMarketer
Amazon’s Prime Day advertising hiccup highlights the event’s importance  eMarketer

NBCU Closes 2024-25 Upfront Touting ‘Modest’ Advertising Commitment Growth - TV News Check
NBCU Closes 2024-25 Upfront Touting ‘Modest’ Advertising Commitment Growth  TV News Check

How CTV is rewriting the political advertising rulebook this campaign season - Ad Age
How CTV is rewriting the political advertising rulebook this campaign season  Ad Age

Meet the Challenger Adtech Firms Competing to Grab Oracle Advertising Clients - Adweek
Meet the Challenger Adtech Firms Competing to Grab Oracle Advertising Clients  Adweek

Katz: More Effective Advertising In The Cards For Casinos Using Radio. - Insideradio.com
Katz: More Effective Advertising In The Cards For Casinos Using Radio.  Insideradio.com

Introduction to Advertising and Promotion for Medical Products - Food and Drug Law Institute
Introduction to Advertising and Promotion for Medical Products  Food and Drug Law Institute

Podcaster Ashley Flowers on politics, advertising, and a possible ‘Crime Junkie’ TV show - Semafor
Podcaster Ashley Flowers on politics, advertising, and a possible ‘Crime Junkie’ TV show  Semafor

False advertising lawsuit against Back to Nature Foods Co revived - Top Class Actions
False advertising lawsuit against Back to Nature Foods Co revived  Top Class Actions

Despite Ruling, Fights Over Maryland’s Digital Advertising Tax Continue In Court - Forbes
Despite Ruling, Fights Over Maryland’s Digital Advertising Tax Continue In Court  Forbes

Cheap advertising ? - Expat Forum
Cheap advertising ?  Expat Forum

NBCUniversal Closes 2024-25 Upfront Touting Modest Ad Growth - TheWrap
NBCUniversal Closes 2024-25 Upfront Touting Modest Ad Growth  TheWrap

Fortman: TH Media and Woodward Community Media announce $1 million advertising grant program - telegraphherald.com
Fortman: TH Media and Woodward Community Media announce $1 million advertising grant program  telegraphherald.com

Netflix’s ad-supported tier grows 34%, with critical scale in sight - Marketing Dive
Netflix’s ad-supported tier grows 34%, with critical scale in sight  Marketing Dive

Netflix Analysts Praise Q2 Earnings, But Are Cautious On Advertising Growth: 'Slower Than NFLX Planned' - Benzinga
Netflix Analysts Praise Q2 Earnings, But Are Cautious On Advertising Growth: 'Slower Than NFLX Planned'  Benzinga

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Massive Outage Impacts Advertising, Publishing - What We Know 07/22/2024  MediaPost Communications

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Katz: Radio Advertising Gives Casinos A ‘Winning Hand’  Radio Ink

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Win a free month of advertising on PIX11  PIX11 New York News

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The strategic advantage of in-game advertising for marketers  The Drum

Arizona AG sues Dodge Ram engine makers, alleging fraudulent emissions advertising - ABC15 Arizona in Phoenix
Arizona AG sues Dodge Ram engine makers, alleging fraudulent emissions advertising  ABC15 Arizona in Phoenix

Adidas pulls Bella Hadid ad from campaign linked to 1972 Munich Olympics after Israeli criticism - CBS News
Adidas pulls Bella Hadid ad from campaign linked to 1972 Munich Olympics after Israeli criticism  CBS News

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Playing to win: unboxing the Hasbro, Kraft Heinz and Vanish winning advertising strategies  The Drum

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Allspring Global Investments Holdings LLC Purchases 535 Shares of Lamar Advertising (NASDAQ:LAMR)  American Banking and Market News

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One Classic Movie Was A Huge Hit Without Advertising – Thanks To One Shrewd Studio Move  SlashFilm

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The ‘Mad Men’ Era Is Long Over. Why Is Advertising Still So White?  The New York Times

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BCI’s ban on advertising, soliciting litigation work sparks debate among lawyers  The Hindu

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Uber advertisement approved for Prestonsburg Tourism  Floyd Chronicle & Times

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Advertisers don’t seem too tempted by Meta putting ads on Threads  Digiday

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Board of Commissioners decide to advertise a one mill increase  Americus Times-Recorder

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Community building is the key to engaging modern audiences  Campaign India

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Advertising industry reacts to the King's Speech  Research Live

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Advertising Will Drive Global Media & Entertainment Growth, Contribute 30% Of Streaming Sales By 2028, Says PwC’s Annual Outlook  Deadline

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PETA ad prompts ban on ferry advertisements  Martha's Vineyard Times

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SNAP at Farmers Markets: Advertising and Marketing  USDA Food and Nutrition Service

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Paramount Ads Manager Brings TV and AI-Powered Creative to Smaller Businesses  Adweek

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Cooling down rhetoric in wake of assassination attempt? Who's saying and doing what in Pa. US Senate race  WTAE Pittsburgh

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Advertisers fear supporting journalism, here’s how to fix that  Washington Examiner

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Press Release: FOP Denounces Political Advertisement  The Missouri Times

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Exclusive: Taboola to sell ads for Apple  Axios

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How AI can Enhance Personalized Digital Advertising Campaigns  TechiExpert.com

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What We Learned From Netflix's Latest Quarterly Earnings  Investopedia

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Mirriad Advertising (LON:MIRI) Stock Price Down 7.7%  American Banking and Market News

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You Think You Know How Misinformation Spreads? Welcome to the Hellhole of Programmatic Advertising  WIRED

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Allspring Global Investments Holdings LLC Has $314,000 Stock Holdings in Lamar Advertising (NASDAQ:LAMR)  Defense World

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Pixalate's June 2024 Global Mobile Publisher Trust Index  GlobeNewswire

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Advertising - Paramount
Advertising  Paramount

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Meta Hit With EU Charges Over Targeted Advertising  The Wall Street Journal

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