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Measuring Advertising Effectiveness

Measuring Advertising Effectiveness

A customer who doesn't know much about your business, or doesn't even know it exists, won't purchase your products or services. Public relations campaigns can help get you in the public eye, but for most businesses, effective advertising is critical. But effective advertising means more than simply spending large amounts of money on a variety of advertising media. Your overall goal is to receive a real, measurable return on your investment. A secondary, but just as important goal is to analyze the effectiveness of different types of advertising; that way you can ensure that each advertising dollar is spent wisely.
The process of measuring advertising effectiveness starts with a simple formula: Return on Investment.
Return on Investment (ROI) evaluates cost against return. (While ROI can be used to evaluate advertising expenditures, it can also be used to evaluate any type of investment, improvement project, process redesign, etc., virtually any situation where money will be spent and a return on that spending is expected.
Here is the formula:
ROI = (R – CI ) / CI X 100
R = Gross Margin (Sales Revenue-Cost of Good Sold)
CI = Cost of Investment
The result is a ratio; the higher the ratio, the better the return. For example, say you decide to run a new direct mail campaign. You print 4,000 postcards and mail them to potential customers; the total cost of printing and mailing is $2,000. As a result of the campaign you generate $9,500 in sales and $5,000 in Gross Margin. Simply do the math:
$5,000 - $2,000 = $3,000; $3,000 / $2,000 = 1.50, or 150%. Your ROI on the direct mail campaign was 150%.
Other factors may have come into play. If your postcards advertised customers a discount on a specific item, the discount will have affected your total profit level on the sales of those items. But that is okay, especially since you generated increased revenue, (more total sales) and hopefully some of your new customers purchased other items as well. That's why evaluating advertising effectiveness can become somewhat subjective; other financial factors do come into play.
Another variable that makes evaluating advertising effectiveness difficult is utilizing different types of advertising media. For example, say this month you run a television ad, three newspaper ads, and run one direct mail campaign. How can you determine the return generated by each type of advertising?
Possibly you don't care. You may simply decide to measure the program's overall effectiveness. In that case, add up all the costs of advertising, determine your total sales, and calculate ROI. On a one-month basis you won't learn much; evaluated over time you will be able to see trends: whether your return is increasing, decreasing, or staying flat.
A better way is to tie specific items or activities to specific forms of advertising. Your television ads may be a general awareness ads designed to increase market awareness. Newspaper ads are typically used to spread the word about specific sales or product offerings. Direct mail pieces should target a specific item or service and call for a direct response.
Say you run a lawn care business and produce a direct mail flyer advertising a 10% discount for customers who sign-up for a seasonal lawn care program. Measuring the effectiveness of the flyer is relatively simple: just keep track of the number of customers who call in response and evaluate the revenue generated against the cost of the flyer. You can do the same with newspaper or television ads: include information about a specific item, service, discount or sale and then measure the increase in activity against the expense.
Imagine you run a retail store and decide to place a large ad in the newspaper. You provide an overview of your store, but you also mention that you are running a "10% Off Everything in the Store" promotion this weekend. At the end of the weekend, compare your total sales for that period against sales on non-promotional weekends; the difference is, in large part, the result of the newspaper ad you placed. Then calculate ROI.
Say you spent $1,500 to place the advertisement. On a "normal" weekend, your store does $6,500 in sales. This weekend you did $11,500 in sales. While other factors may have come into play, you could easily assume that the additional $5,000 in sales was due to the ad you ran in the newspaper. Assume the Gross Margin on these additional sales was fifty percent, or $2,500. To calculate ROI: $2,500 - $1,500 = $1,000; $1,000 / $1,500 = 0.66, or 66%. Your ROI for the campaign was 66%. (In essence, you received $0.66 in profit after every advertising dollar you spent, which is a good return on investment.)
The key to evaluating advertising effectiveness is to work hard to determine where sales and revenue originated, at least in terms of the advertising you place. If you run three types of advertisements, all featuring the same products or discounts, simply add the total of your advertising spending together. If you wish to evaluate television, radio, print, etc., advertising separately, try to tie unique items to each type of advertising so you can determine the impact of each method. It's not as hard as you think, especially if you ensure that most of your advertising messages include a direct call to action. Otherwise why spend the money on advertising in the first place?

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