Determine if Your Fall Advertising Activities are Profitable
Originally published: 08.01.18 by Ruth King
Before you invest your hard earned dollars on advertising this fall, calculate whether that advertising can be profitable.
Whether you advertise in the newspaper, on television, through your website, direct mail, Facebook or other advertising medium, you should make that investment with an estimate of what results are required for that advertisement to be a good use of your money.
The calculations are very simple. Here’s how to estimate whether the investment may be a good investment.
What is the break even expense of sending 1000 postcardsincluding design of the postcard, printing and mailing costs? Take that number and divide by your gross margin of that department. And no, not one minus the gross margin.
Let’s assume that your cost is $0.50 each and the gross margin of the department is 55%. Mailing 1000 postcards costs $500. The break even revenues that must be generated are $500/55 percent or $909.09. Assume that you’re advertising a fall safety inspection at $89, then you must generate 10.21 of these items. At 11 items, you earn a profit. Can you generate 11 fall safety inspections from 1,000 names? That is a 1.1 percent return. The answer is maybe: it depends on who you’re sending the postcards too. If you’re sending the postcards to people in your database who have not done business with you in the past 2 to 3 years; then the answer is probably yes.
If you’re sending the 1000 postcards to a zip code where you haven’t done much business, then the answer is probably no. You’re likely to get a 0.5 percent return or less on this type of mailing.
If you’re advertising replacement systems where the average cost to replace a system is more than $909.09, you just need one response to break even. Is that likely to happen? Probably.
To see that this is the break even number, enter the data into your profit and loss formula:
You can use this calculation for any type of advertising you plan to do. Let’s assume you’re paying your web services company $1500 per month to maintain your website.
The gross margin of your company is 45 percent. What is the break even dollars that must be generated from your website each month to cover the cost of the maintenance?
The break even sales that must be generated is $1,500/45 percent or $3,333,33 per month. To be fair, let’s look at an entire year because of seasonality. The break even sales volume from your website is $40,000 per year. Can your website do this?
The only way to answer this question is to track where your leads and sales are coming from. If a new customer contacts your company, you must ask the question: “How did you find out about us?” Or, “How did you hear about our company?”
If the customer says a web search, then you track the dollars generated from that customer and attribute them to the website.
More than Break Even
Finally, let’s assume you want to earn a profit on the advertising. You want to do more than break even.
Using the same postcard example, if you want to generate a 10 percent profit, what do the sales need to be? The cost is still $0.50 for each postcard and the gross margin of the department is still 55%. This time use this calculation:
Sales = Postcard cost divided by the difference of Gross margin and desired profit. The revenues that must be generated are $500/ (55%-10%) or $1,111.11.
Assume that you’re advertising fall safety checks for $89, then you must generate 12.48 of these items. At 13 items you earn a profit. Can you do that?
To see that this is the number you must generate, enter the data into your profit and loss formula:
So, before you make any advertising purchase, determine whether you can at least break even on that purchase or earn your desired net profit on that purchase. If you can’t earn what is necessary from the advertising expenditure, then don’t make the purchase.