Are Your Ads Profitable?

By Jeff

: Image via Wikipedia

If you aren’t sure, you aren’t alone. Most business people don’t really know if their ads are profitable, and don’t have much idea on how to go about measuring such profitability. Many advertising companies prefer it this way, as ignorant customers don’t know or can’t easily find out it they are getting their money’s worth. Remember, an advertisement is nothing but an expense unless it generates additional sales.

What you need:

Some way to measure the number of responses to a particular ad.
The percentage of these that turned into sales.
The cost of your advertisement campaign

Now, take the number from 1, let’s say it’s 1000 for a given ad. Suppose you calculate that 8% of your responses result in sales, a reasonable number if your ad is well designed. So this ad results in 80 new sales. Now, suppose your average profit per sale is $150, and the cost per run of the ad is $1234. 80 x 150 = $12000. If you subtract out the cost of the ad, you get 12000 – 1234 = $10766. This ad is tremendously profitable.

Let’s take the Yellow Pages as a more concrete example. How do we track the response rate of this type of ad? You need a line of communication specific to this ad, whether phone line, email, or whatever. But this ad needs to have its own dedicated line. The cost of a display ad varies by locality. This article says that the difference between Manhattan, New York and Manhattan, Kansas is nearly $80,000 for a full page display ad. Let’s go with Kansas for our example. Then a full page ad will run you around $11,000. If we keep our average profit per sale of $150, and our response and conversion rates of 8% and 1000 respectively, then the this ad will net you $1000. This is a ROI of 9.1%. Not shabby, but not great. The total response of 1000 is probably way too low, unless your ad is junk. If we assume its 5000, then we get 400 conversions, or a gross of $60,000 and net of $49,000. ROI is now 445%

Make sure you have a way of tracking the effectiveness of your advertisements. Even if you use an advertising agency, this is still your due diligence to make sure you are getting a good deal. Don’t take their word for it.