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8 Simple Steps to Help you Estimate A Return on your Advertising Investment

Imagine this. 

One day, while sitting in your office and dreaming of ways to make more money, you call up a stock broker and buy several thousand dollars’ worth of stock in TBD Corp. 

The thing is, you are not a professional investor, far from it, and outside of bull markets (when everyone wins), most of the stocks you pick LOSE MONEY! 

And, your decision to purchase TBD Corp. wasn’t based on any research.  Not a single piece of data.  Not even a glance at CNBC.  

Frankly, you winged it, and relied on gut instinct.

Sounds crazy, Right?  But guess what, this is how most business owners buy their advertising. 

Nobody, well, maybe some people buy stocks this way, but they shouldn’t.

So, why the heck would you buy ADVERTISING this way?

Well, in advertising, gatekeepers (media companies, ad agencies etc.) guard the most helpful research.  Stock market investors, however, can access an abundance of helpful research from a variety of sources absolutely free.

For example, without even logging on to their website, I’m able to access all kinds of helpful research from Vanguard (a large mutual fund company) about any stock or mutual fund in the US. 

At my finger tips are charts, news, financials, shareholder details, price history, earnings reports, analyst opinions and much more. 

You would assume, in the world of advertising, with advances in technology and access to information, a business owner (like you) would be able to find research (like this) designed to help (you) make better decisions.

But you’re wrong.

The advertising marketplace is shadier than a rain forest.

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half”.

John Wanamaker (1838-1922) opened one of the first and most successful department stores in the United States, which grew to 16 stores and eventually became part of Macy’s.

You can’t and won’t find this information anywhere because:

  1. Gatekeepers (ad agencies/consultants/research services) don’t want you to have it and they make it so expensive no business owner (other than an ad agency or consultant) could justify the cost. 
  2. This limited access to research creates the illusion that most advertising cannot be measured by the common person, or in many cases, creates the belief it can’t be measured at all. 

Wanna know what’s crazy?

BILLIONS of dollars are spent each year on advertising without any consideration of past or future performance.

And worse, without any regard to its return on investment. 

This is partly due to the amount of “brand” advertising that exists in the marketplace today. 

If you’ve been fooled into believing that “branding your business” is a wise marketing strategy, then I have some penny stocks I’d like to sell you. 

I’m not saying building a brand or branding your business is a bad idea.  If you have a budget like Coca Cola and Budweiser – then by all means brand away. 

But most businesses don’t and instead should start thinking about their marketing budget differently. 

Every campaign should start with projections on potential profit, and I will show you how to do this with a simple formula. 

And this starts with having measurable and compelling offers in your advertising.  (More on how to get response to your advertising here: https://intelligent-advertiser.com/2018/11/24/the-secret-to-getting-more-response-from-your-advertising/)

This approach isn’t perfect, nothing is, but it beats blindly spending money and hoping for success. 

Or even worse, being taken advantage of by an advertising agency or marketing consultant who are often afraid to take responsibility for the results. 

What You Need to Know and How to Get it

In the graph below, I’ve projected a return on investment for a local TV campaign – a media that many people believe is tough to measure.   

In order to do this, you need to collect some information from your media vendor and apply it to metrics you should already know (or learn) about your business. 

  1.  Determine the verified effective reach:  In the simplest terms this is the number of people who see your ad at least 3 times per week.  This used to be (back in the 80’s) the prescribed amount of exposures to make sure people saw and understood your message/offer.  But today, in our increasingly cluttered advertising world, it’s not enough. However, it’s a good starting point to determine who is effectively being exposed to your ad and your media vendors can supply this so just ask!
  2. Determine the number of buyers in the market: Depending on the industry, about 1 to 3% of the population are in the market and ready to buy your product or service on any given day.  To be safe I usually assume 1.5% so multiply your verified effective reach by .015 and that becomes your pool of potential sales.  This is not represented in the graph but should be in all ROI calculations. 
  3. Establish a reasonable response rate:  Successful direct-mail campaigns generate a 1–3 percent response rate. You can expect a similar response from “buyers” if you have a good offer or compelling message.  Always be conservative and stick to 1 percent. (In the graph please note I used less than 1 percent because I was dealing with a mass media like broadcast television in a major market like Indianapolis, IN. If you operate in large city and are using mass media you should follow this approach as well. Your estimates should always skew conservatively.)
  4. Determine your average revenue per customer: What is your average sale?  If you added up an entire year’s worth of transactions and divided by the total number of transactions – what is that number?  The higher the better!    
  5. Find out your closing ratio.  This varies by industry and also depends on how well your salespeople are trained. The higher, the better!
  6. Estimate the gross revenue.  Number of closed leads resulting in your earlier calculation multiplied by the average sale.  
  7. Know the full cost of your campaign.  Airtime, space, creative and production costs, also costs related to digital for example if you have to create a landing page or update your website.
  8. Calculate the ROI:  Take your projected net profit and divide it by the cost of the campaign including any production or creative costs then multiply by 100.  For example, if you bought a single share of stock for $500, then sold it for $600, you would calculate ROI as follows: $100 (Gain) divided by $500 (initial investment) = .2 x 100 = 20% return on investment.

When it comes to business, it’s all investing, and you can choose to be an investor or a speculator, it’s your choice. 

If you use this simple formula before purchasing your advertising media you will have a better understanding of whether or not the campaign is likely to work, and be profitable   


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