Calculate Your Marketing ROI
Do you sometimes feel like your marketing and advertising is a bottomless money pit? You hire an ad agency that asks what your budget is and then goes about designing creative or catchy ads that are designed to get the attention of your prospect and then imprint your company name through repetition. The problem is that virtually all ad agencies are still living in the ‘Big Brand’ era of the past. Back then, creativity and repetition became the calling card of big advertisers and their methods trickled down into other media. Starting back in the 70’s this became the no-brainer formula for market dominance for companies with the financial resources to pull it off. Business schools started teaching marketing and advertising based on these hackneyed methods, churning out graduates who only knew one way to do “marketing.” Brand Builder marketing and advertising became the de facto standard for “how you do it.” And now, after a few decades, nobody even questions the formula. So I ask, “Do you know what is your marketing ROI?”
The current state of marketing is a mess. Most ads can be classified into two categories:
Institutional ads essentially say, “Here’s our name, here’s our best attempt at being creative, and here’s the biggest budget we could muster to support this C.R.A.P. (Creative Repetition And Positioning). Virtually all ad agencies large and small – specialize in institutional advertising. It’s what you see in most print and TV ads.
Menu-board style advertising
Menu-board advertising essentially says, “Here’s our name and here’s a list of what we have for sale.” Just like a menu at a restaurant. For example, “We’re law firm. We handle motor vehicle accidents, medical malpractice, nursing home abuse, work-related injuries, wrongful death, dog bites, social security disability, dangerous drugs, and truck accidents.” Oh and here’s a picture of one of our attorneys. Get the point? Just like a menu at a restaurant, the ad is simply a list of services or what’s for sale. You can’t measure ROI with institutional or menu-board style advertising. It’s impossible.
Any dollars spent on advertising and marketing should come back to you – and bring along a bunch of friends with them. But how can you know in advance?
Let’s take a look at how to figure out how much money you should spend on advertising. It seems people always want some sort of magical formula; they want to know in our industry our ad budget should be 10% of sales. Or in this other industry it should be 15% of sales minus cost of goods sold or some other arbitrary figure.
In our professional experience we believe you should spend as much as possible as long as it’s making you money. This is called “Positive Marketing ROI.” But you have to think a certain way to pull this off. Most people concern themselves too much about industry standards and corporate budgets rather than monopolizing their marketplace.
Too often clients are shocked when they find out how much media costs when it comes time to launch their advertising campaign. For instance an entry level radio campaign can run from $800 – $8,000 per week depending on the size of the market. Or a TV commercial can run from $30,000 – $500,000 for a 30-second spot on national television. How about spending anywhere from $5,000 – $50,000 per month for a Google Adwords PPC campaign?
It’s easy to conclude these forms of advertising are expensive. However, you have to ask yourself: Do the ad campaigns really cost too much? A savvy advertiser will tell you the cost of the ad campaign is not the real issue. What’s important is the return the ad campaign will bring you. For instance, if you invested $8,000 a week for radio advertising that generates $10,000 in profit, would $8,000 be a lot of money? Of course not! You’d be a fool not to do whatever you could to invest in more advertising with this kind of return. Heck, I’d invest $25,000 in any type of advertising campaign that returned even a $2,000 profit in a week! Can you get those kinds of returns in the stock market? Heck no! Earning a fortune in business is easy to do when you learn how to harness the potential of marketing and advertising leverage. Do you now see why we talk about your marketing ROI?
Determining your marketing ROI is a basic financial equation you should already know. First, you have to know how much profit you make on each sale. For example, if buy something for $100 and sell it for $200, your gross profit is $100.
Next you have to calculate your closing ratio. If on average you close one sale for every five prospect inquiries, that’s a 20% closing ratio. If five out of every 10 prospect buy, then you have a closing ratio of 50%.
Now you have calculate your break-even amount. You do this by taking the cost of the ad campaign and dividing it by the amount of gross profit per sale. For example, if the ad campaign cost you $5,000 and your average gross profit is $100, then you have to make 50 sales to recoup the $5,000 investment. This is your break-even point.
Lastly you have to figure out the number of leads you need to generate from the ad to break even. To do this you have know your closing ratio. For example, say your closing ratio is 25%. If you close 25% and you need 50 sales to break even, you need to generate 200 leads to break even on a $5,000 investment.
In this example, we calculated you would break even if a $5,000 ad campaign could generate 200 leads since you need 200 leads to make 50 sales. With a $100 gross profit per sale, that would return your $5,000 investment. That’s an ROI of 0 (zero). Of course you’re 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 campaign. At least you didn’t end up with a negative marketing ROI!
Now let’s say you want to triple your money. What would have to happen to your numbers? You’d have to triple your lead generation or in this case, generate 600 leads instead of 200. This means that if you generate 600 leads you would earn a profit of $15,000 on an investment of $5,000.
However, what would happen to your closing ratio if you were generating higher quality leads? Consider what if you were to increase your closing ratio from 25% to 35% or 45%? The number of leads you need would decrease. If any of your numbers change, it affects your overall outcome. Why do you think any savvy investor always has to know their numbers?
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