Welcome to Business advertising
Wednesday, March 28, 2007
Using ROI (Return on Investment) as a Marketing Tool
One thing that I’ve learned after 35 years in advertising is that no business wants to pay more than they have to for promotional expenses. It’s understandable considering all the various marketing options and the associated costs. A business has so many fixed overhead expenses from insurance to rent to employees that advertising is often left to the very end. The sad truth is that without proper promotion, the business can’t survive. I sold Yellow Page ads for 25 years and was invariably told that the ads were just too expensive. I used to ask, compared to what? It was then that I realized that I needed to educate my clients.
What I ended up doing was justifying the investment through the use of the ROI or the “return on investment” technique. In basic layman’s terms, it works like this. Suppose you have purchased a newspaper ad for $100. Say you’re a florist and profit $10 on average per order. So you now need 10 orders to offset the cost of the ad. That’s the simplified version and it can be applied to almost any other media: TV, radio, Yellow Pages, direct mail, and so forth. It requires that you know the exact costs and your own profits. If the marketing program takes place over several days, weeks or months, the plan is the same.
First, decide which media is most appropriate for your kind of product or service. Then figure your average profit. For instance, if you’re a plumber and the average job is $150, what is the profit after you have paid for the parts, truck and employee? Let’s assume it’s $50 left. So, if you are looking at a $500 per month Yellow Page ad, the first 10 jobs per month would break you even. But it’s a bit more complex than that. If that YP book reaches 100,000 people for $500, but another directory covers 500,000 people and the ad is $1500, which is the better deal? Sure, now you have to get 30 jobs to offset the charge, but you are seen by 400,000 more potential customers. Therefore, the ROI is far more optimist with so many more people seeing your ad.
As a result, the ROI is important when considering an overall budget of a media mix. Also look at other potential profit areas, The local home remodeler might consider spending more in a pricier, high-end magazine that reaches fewer home-owners, but those living in expensive homes. Why? Because his profit might be greater, per job. For example, his Yellow Page ad reaches everyone and he figures he makes $10,000 profit on an average home and therefore uses a 5 to 1 ROI for his YP program. So, he spends $50,000 on an annual YP ad distributed to 500,000 and needs 5 jobs to cover that YP cost. But, in the glossy magazine that goes to only 10,000 upper-level consumers, he might reap a $30,000 profit per job. He still spent $50,000 on a quarterly distribution for a year, but only needs 3 jobs or a 3 to 1 ROI. Have you got that? The type of media dictated the ROI based on a reconfigured profit margin. The media determines the average customer and the market.
Your radio, TV, magazine or YP rep can give you the demographic numbers and the reach for each media. They can show you the spending habits of the typical listener or reader, which will allow you to design an ad around the person you are trying to attract. Then the ROI should be used to establish the amount you are willing to invest in the short or long run. Each media can be used for different time frames. Some have fixed dates of delivery and longevity such as Yellow Pages, magazines and newspapers. Others, like direct mail, and TV can be purchased with relatively short notice, depending on availability.
What ever route you take, the ROI is the most important rule of thumb, followed closely by a tracking method to monitor your results. Without that, you have no way of knowing how well the ad worked and whether or not you covered your ROI. If you’re interested in learning more, I wrote a book on how I worked with my Yellow Page clients for 25 years on developing this type of strategy. Even if you use other media, it may be of interest to you as well. Visit poweradbook.com to learn more and remember that the advertising cost is something that is an investment in your business and not just an overhead expense. The ROI will become your ally in deciding where to allocate you funds and can ultimately save you a small fortune
What I ended up doing was justifying the investment through the use of the ROI or the “return on investment” technique. In basic layman’s terms, it works like this. Suppose you have purchased a newspaper ad for $100. Say you’re a florist and profit $10 on average per order. So you now need 10 orders to offset the cost of the ad. That’s the simplified version and it can be applied to almost any other media: TV, radio, Yellow Pages, direct mail, and so forth. It requires that you know the exact costs and your own profits. If the marketing program takes place over several days, weeks or months, the plan is the same.
First, decide which media is most appropriate for your kind of product or service. Then figure your average profit. For instance, if you’re a plumber and the average job is $150, what is the profit after you have paid for the parts, truck and employee? Let’s assume it’s $50 left. So, if you are looking at a $500 per month Yellow Page ad, the first 10 jobs per month would break you even. But it’s a bit more complex than that. If that YP book reaches 100,000 people for $500, but another directory covers 500,000 people and the ad is $1500, which is the better deal? Sure, now you have to get 30 jobs to offset the charge, but you are seen by 400,000 more potential customers. Therefore, the ROI is far more optimist with so many more people seeing your ad.
As a result, the ROI is important when considering an overall budget of a media mix. Also look at other potential profit areas, The local home remodeler might consider spending more in a pricier, high-end magazine that reaches fewer home-owners, but those living in expensive homes. Why? Because his profit might be greater, per job. For example, his Yellow Page ad reaches everyone and he figures he makes $10,000 profit on an average home and therefore uses a 5 to 1 ROI for his YP program. So, he spends $50,000 on an annual YP ad distributed to 500,000 and needs 5 jobs to cover that YP cost. But, in the glossy magazine that goes to only 10,000 upper-level consumers, he might reap a $30,000 profit per job. He still spent $50,000 on a quarterly distribution for a year, but only needs 3 jobs or a 3 to 1 ROI. Have you got that? The type of media dictated the ROI based on a reconfigured profit margin. The media determines the average customer and the market.
Your radio, TV, magazine or YP rep can give you the demographic numbers and the reach for each media. They can show you the spending habits of the typical listener or reader, which will allow you to design an ad around the person you are trying to attract. Then the ROI should be used to establish the amount you are willing to invest in the short or long run. Each media can be used for different time frames. Some have fixed dates of delivery and longevity such as Yellow Pages, magazines and newspapers. Others, like direct mail, and TV can be purchased with relatively short notice, depending on availability.
What ever route you take, the ROI is the most important rule of thumb, followed closely by a tracking method to monitor your results. Without that, you have no way of knowing how well the ad worked and whether or not you covered your ROI. If you’re interested in learning more, I wrote a book on how I worked with my Yellow Page clients for 25 years on developing this type of strategy. Even if you use other media, it may be of interest to you as well. Visit poweradbook.com to learn more and remember that the advertising cost is something that is an investment in your business and not just an overhead expense. The ROI will become your ally in deciding where to allocate you funds and can ultimately save you a small fortune
# posted by gopi @ 8:57 PM 
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