I have been researching the costs and benefits of different advertising options. So here are a few of my thoughts.
First, you should have a business plan. Your business plan describes your goals, action steps, and provides a SWOT analysis of your business and the market place.
Next, you should develop a marketing plan. That further defines your target client, his or her needs, and how you can use your products and services to address those needs.
Then, you should develop a sales forecast. This will indicate your expectations for revenue over the next year.
Then, you can develop your marketing budget. Opinions vary as to how much you should spend on advertising. Some say it should be 2 to 5% of your revenue. Others say it should be in the 5 to 15% range. Sometimes this is a matter of semantics.
If you include in your marketing budget all your efforts to promote your business, it can easily exceed 10 to 15%. Promotion would include your expenses on letterhead, business cards, magnets, coffee mugs, t-shirts, and any other items where you are promoting your business and its name. Promotion would also include discounts given to key clients in order to generate more business. This number is hard to determine since is usually does not show on your profit and loss statement.
From your total promotional budget there is a subset for advertising. This is what is more typically budgetted for in the 2 to 5% range. This would include your expenses for your phone book listing, advertising in the local newspaper, advertising in special interest magazines, direct mail efforts, cold calling efforts, and other deliberate advertising endeavors.
One issue with budgetting your advertising dollars is when the money is spent. If things are not going well, sometimes the first thing to be cut back on is advertising. Of course this is like buying a stock when it is high and then selling it when it is low. If business is slow, that is the time when you need to expend the most on advertising.
Also some businesses will cut back on advertising when they are getting very busy. While this can make sense, you need to determine if the current increase in business is permanent or just a temporary fluctuation. If it is permanent, then you could cut back on promotion until you have formulated plans for handling additional business by adding capital or staff.
So now we will assume you have a business plan, you have a marketing plan, you know who your target market is, and you have a budget set for your advertising dollars. So the next step is determining where you should spend your advertising dollar? Right?
Of course not. You need to think about a few more things. What is your profit per sale? What is your profit margin? If your product or service costs you $8.00 to produce and you sell it for $10.00, then your profit per sale is $2.00. Likewise your profit margin would be 20%. $10 minus $8 is $2.00 profit per sale. $2.00 profit divided by $10.00 sales price is 20%.
Is your customer base local or national? If you sell product that can easily and cheaply be shipped across the country then you could have a national customer base. If you sell a service, your customer base is probably local, unless you can provide this service overthe phone or via email.
Is your customer base easily segmented? Do you sell to a niche or to a broader market? If only bird watchers buy your product you have an interesting niche. If you sell to men of any age then you have a broad market.
Again defining your customer base should be included in your marketing plan.
Now you need to understand some marketing lingo. I have worked on various marketing efforts in the past including direct mail programs, customer focus transformation, customer relationship management, customer surveys, etc.
Take the time to educate yourself. Contact different advertising firms: your local newspaper, a special interest magazine, the phone book sales representative, a web site directory. Get their opinions on the pros and cons of different options. Of course they are trying to sell you something. So obviously they are going to emphasize why advertising with them is of more benefit than other types of advertising.
They will probably try to explain CPM-Cost per Thousand Impressions and CPMM-Cost per Thousand Impressions per Month. M of course represents one thousand in roman numerals.
Then you should ask about what the expected response rate is. Of course if one thousand people see your ad, that is of little benefit. If one thousand people see your ad and one hundred people respond that is a response rate of 10%. If ten people respond that is a response rate of 1%. Ten divided by one thousand - 10/1000 equals .01 or 1%.
Next you need to know your own conversion rate. Perhaps you will need to provide a quote for your services or product. If you quote 10 people how many people buy your product. In some cases if people respond to an ad for a low cost item where there is no quotation involved your conversion rate could be 100%. However for many businesses you must prepare an estimate. Or the consumer may bid below your stated price. If your conversion rate is 20% that means for every ten people that respond you will make two sales. 2 divided by 10 equals .20 or 20%.
Finally, what is your profit margin and profit per sale? If your annual revenue is $100,000 and your profit is $20,000 then your profit margin is 20%.If your product sells for $100 and it costs you $80 to produce it, then your profit per sale is $20.
So let's put it all together with a hypothetical example. You put an advertisement in the monthly magazine. The circulation is 100,000 subscribers. If the cost per thousand is $10 then you will pay $1,000 to place an ad. $10 times 100,000 divided by one thousand equals $1,000.
If the response rate is one percent then one thousand people will respond. .01 times 100,000 equals 1,000. Then your cost per thousand impressions was $10, but your cost per response was $1.
If your conversion rate is ten percent, then you will generate 100 sales. .10 times 1,000 equals 100. Your cost per sale is $10. $1,000 cost divided by 100 sales.
If your sales price is $100 then you will generate $10,000 in revenue. $100 times 100 equales $10,000.
If your profit margin is 20% then your profit will be $2,000. $10,000 times .20 equals $2,000.Finally your profit for this campaign is $1,000 which is the advertising cost of $1,000 subtracted from your normal profit of $2,000.
Not bad.
Now add in the soft costs. How much time did you spend on this project. If you spent 50 hours responding to the ads, preparing quotes, designing the ad, etc., then you made $20 per hour. $1,000 divided by 50 hours equals $20.
Not so great.
So what can you do. Marketing and Sales come down to a number game. If you can improve any of the ratios above you will improve the impact of you promotion efforts.
You can improve the response rate by designing your ads carefully. Choose advertising outlets that will reach your target market. If your customer base is local, then focus on the phone book and the local newspaper. If your customer base is a nich focus on magazines, newsletters or web sites that are directed to that group.
You can improve your conversion rate by being easy to do business with. Try to streamline the process of preparing quotes. Perhaps hire someone at $10 an hour to sift through the responses. Train them to prepare the estimates themselves with minimal supervision. Your advertising can include a rate chart or you could put a calculator on a web site where customers could generate a quote for themselves.
You can improve your profit margin by keeping your debt level and expenses as low as possible. In the end it's not what you make but what you get to keep.
So what is the best value out there? Advertising is very competitive. Therefore the prices are kept low by market forces. If advertisers were charging too much, then someone else would enter the market with a lower price. Look at the cost per thousand and the response rate. Some advertising might cost $1 for every item with a 10% response rate. Other options might cost $.10 per item with a 1% response rate. Other options might cost $.01 per item with a .1% response rate. In all of these cases you are paying the same $.10 per response.
Here are some of the costs I collected from somewhere on the internet.
Direct Mail $934 per 1000 people
Magazine Full Page Color Ad $700 per 1000 people
Direct Mail $500 per 1000 people
Post Card $265 per 1000 people
Magazine Half Page Ad $58.54 per 1000 people
Coupon $53 per 1000 people
Online Super Banner Ad $50 per 1000 people
Shared Direct Mail $40 per 1000 people
Online Banner Ad $30.00 per 1000 people
Search Engine $24 per 1000 people
National Newspaper Ads $23 per 1000 people
Online Banner Ad $20.00 per 1000 people
Coupon $20 per 1000 people
Prime Time TV $16.00 per 1000 people
Prime Time Cable TV $10.60 per 1000 people
Magazine Ads $9 per 1000 people
Radio Ads $8 per 1000 people
Day time TV $5 per 1000 people
So you can see direct mail has the highest cost per item while radio and TV ads have the lowest. Of course the response rate runs in the opposite direction so your ultimate cost per response is probably similar.
Other advertising options but I do not have the per thousand information.
Local Phone Book Full Page $7,120 per month
Local Phone Book Full Page $3,290 per month
Local Phone Book Quarter Column $172 per month
Online Featured Ad $150 per month
Online Top Banner $150 per month
Local Phone Book quarter column ad $133 per month
Web Site Hosting by Phone Company with do it yourself design 5 pages $105 per month
Web Site Design starting at $749 - $62.42 per month
Local paper column inch $55.92 per month
Local Little Phone Book Quarter Column $51 per month
Online Banner Ad $50 per month
Web Site Submission $49.95 per month
Local paper three lines $42 per month
Web Site Hosting with Design $39 per month
Web Site Hosting $29.95 per month
Web Site Hosting with do it yourself design $19.95 per month
Web Site Hosting $19.95 per month
Web Site Basic Hosting $14.95 per month
Local Phone Book line listing $13.50
Online Web Site Link $14.95 per month
Online Banner $8 per month
Web Site Submission $6.33 per month
Online Standard Banner $5 per month
Online Classified Ad $3 per month
Web Site Domain Registration $35 annual - $2.92 per month
Web Site Domain Registration $15 annual- $1.25 per month
From this you can see that the most expensive options per month probably reach more people through a greater circulation.If the local phone book reached one million people then you are paying $7.12 to 3.29 per thousand people. If those web site banners reach 1,000 people then your cost is $5 to $8 per thousand people.
So your bottom line will be your cost per response. In one project our current cost per item was around $4.00. Our response rate was 4% which is typical of direct mail efforts. So our cost per response was $100. Our conversion rate was about 30% so our cost per sale was $333. Our revenue per sale including renewal sales was only $375. Revenue of $375 minus cost of $333 equals a small profit of $42 per sale.
A sales consultant was hired to improve the conversion rate. The weekly classes cost an additional $4.80 per item if you include the down time for the sales people and the consultant's fee. If the conversion rate improved from 30% to 40% that would be a significant improvement. So old cost per item $4.00 divided by 4% response rate divided by new 40% conversion rate would lead to a cost per sale of $250. So the profit per item would be $125. That is not too bad.But wait. The cost per item acutally increased to $8.80 per item because of the consultants fee and the staff down time. So new cost per item $8.80 divided by 4% response rate divided by new 40% conversion rate would lead to a cost per sale of $550 per item. This would have been a net loss of $175 per sale. Good job!
On the other side of things I was the manager responsible for improving the work flow. The cost per item was reduced from $4.00 per item to $2.40 per item. This was done by removing non value added tasks and automating the process with a database. Essentially I cut the labor required in half. Also by running the records through a database we could eliminate over 40% of the items that were not valid leads. This had the effect of increasing the response rate to around 7%. So ignoring the sales changes our new cost per item would be $2.40 divided by our new response rate of 7% divided by our old conversion rate of 30% would lead to a cost per sale of $114. This would have been a profit of $261.
Unfortunately both efferts were launched at the same time. So our cost per item was $7.20 divided by our response rate of 7% divided by our conversion rate of 40% led to a cost per sale of $257. This would be a profit of $118 per sale compared to our original $42 per sale. You can guess who got the credit. You can guess who decided to be a consultant.
A project for a client created a cost of $500. The response rate was only .4%. However the revenue generated was $10,000 and the profit margin was 20%. So the net profit was $1,500.
One client spent about $1,000 on advertising in local coupon magazine. The response rate was 0%. Cost per sale would be $1,000 divided by 0. That equals infinity.
So there are no simple answers. If you have a local customer base, then local newspapers and the local phone book might be your best investment. If you sell a specialty product, advertise with magazines and web sited devoted to that audience. Keep track of where you are getting your business from. See where your competitors advertise. Learn from their mistakes.
One clever strategy is a two step process. Traditionally this would be placing a small low cost classified in several newspapers. Because you pay for the number of lines make it very brief. Within the ad you tell the customer to call a phone number for more information. You then have a sales representative answer those calls. That way the customer is identifying themselves as a qualified lead. While your response rate to the ad might be very low, your conversion rate per phone call received shoule be very high.
Another two step process would be to place a small classified ad where you tell the customer to write to a certain address for more information. Once you receive the note from the customer then you send a direct mail piece to them. Since they have identified themselves as a qualified lead, you can feel comfortable spending several dollars on an impressive brochure to send them. Spending five dollars on a brochure to non qualified leads is unprofitable because over 90% of those receiving the correspondence will simply throw it away. But in this case you know your chances are pretty good since they asked to receive the information.
The newest way to utilize the two step process is to utilize the internet. Again place a small classified ad in the newspaper but this time you tell the customer to visit your web site for more information. On your web site you can provide more information than even the most expensive brochure.