Advertising Basics – Fun with Numbers

from RadioGirl 

The other day a client asked me how they could figure out how much they should spend on advertising. That’s an interesting and complicated question. I could literally spend hours crunching figures on advertising investment and return, because it entirely depends on your niche, your goals, and your budget.

You can work on this through two angles. The first way is to make calculations with a specific advertising venue in mind. The second way is to decide on your goals and then find an advertising venue that will meet those goals.

There are several things you need to know about yourself and your business before you can decide how much to spend and where to spend it. If you have an absolute zero budget, which is often the case in home business start-ups, your options may be limited – but there are options. The difference between having a budget and not having one is simply whether you are investing money or time into your marketing.

I believe that a business should know at least three things before they advertise. One essential is knowing your target market. That’s an essential no matter what your budget.

The next thing to know is your profit margin. If you don’t know what you have the potential to make from your advertising, your figures may be off and you may end up spending too much or too little to get the results you want.

Finally, you need to know your average conversion rate. This can be difficult for start-ups to guage. Luckily a little research can give you a fairly educated guess.

These same three details are needed whether you run a brick and mortar business or an online business.

From there you can split into the two methods. Today, I’ll share the first method.

With the first method of calculating, it becomes a number crunching exersize in which you need an additional three pieces of information from the advertising venue. You need to know who they reach (their target market), how many people they reach and the average response rate, and the cost of the endeavor.

Let’s take an advertiser at XM105 as an example. This is the radio station I work for selling advertising and promotional efforts. The example below is for an established brick and mortar store with a physical location, but it is the calculations that are important.

The client sells a product with a profit margin of $75 on an average sale. On average 10% of the traffic will buy on a given visit. Based on extrapolation, XM105 reaches 5000 people within the niched market of this business, about 1/4 of that audience is likely to respond based on historical response rates which works out to 1250 people. The campaign suggested will cost $400 a week over a month campaign for a total of $1200.

Number of people expected to respond x Average conversion = projected sales

1250 x 10% = 125

Projected sales x Average profit margin on sales = Expected Revenue

125 x $75 = $9375

Expected Revenue – Investment = Overall Return

$9375 – $1200 = $8175

Overall Return/Advertising Investment = Return on Investment

$8175/$1200 = 6.81 or a whopping 681% return.

Of course, this is a purely hypothetical situation. Plugging your numbers and those of the advertising you are considering will give you a ballpark of what you can expect from your advertising.

Before you advertise it’s also important to figure out your personal break even point for the advertising. This will help you judge whether it’s worth the risk in relation to the potential gain. It tells you how many sales you need to make in order for the effort to not cost you money.

Investment/Average Sale = Sales Required to Break Even

$1200/$75 = 16

Number of sales needed x conversion rate = Traffic required to break even

16 x 10 = 160

In order for this particular effort to not be a loss for the advertiser, it needs to attract 160 people into the store.

I’ll have more calculations next time if there’s an interest. So let me know if you found this post helpful or not by leaving a comment.

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Comments

2 Responses to “Advertising Basics – Fun with Numbers”
  1. Mara B. says:

    Thank you, Patrysha, for explaining that. Not that I completely understood it all, but at least I have an idea what someone is talking about if I ever need to run a radio ad.

  2. Patrysha says:

    Actually Mara, you can use this for any sort of advertising that you want to do, right down to flyers.

    For example if you know that x posters costs you $x and you get x customers from it and they each bring you in a profit of $x then you can figure out or estimate how much your return on investment is.