Don't Invest Money Until You Know What the Expected Returns Are
Before investing company funds on advertising or any overhead item, calculate whether that advertising can be profitable. Whether you advertise in the newspaper, on television, through your website, direct mail, Facebook, or other advertising medium, you should make that investment with an estimate of what results are required for that advertisement to be a good use of money.
The calculations are very simple. Here's how to estimate whether the investment may be a good investment.
Use this example from Ruth’s Rules #2:
What is the break even expense of sending 1000 postcards including design of the postcard, printing, and mailing costs? Take that number and divide by your gross margin of that department. And no, not one minus the gross margin.
Let’s assume that your cost is $0.50 each and the gross margin of the department is 55%. Mailing 1000 postcards costs $500. The break even revenues that must be generated are $500/55% or $909.09. Assume that you are advertising a product that generates $89 each, then you must generate 10.21 of these items. At 11 items you earn a profit.
Can you generate 11 items from 1,000 names? That is a 1.1% return. The answer is maybe: it depends on who you are sending the postcards to.
You can use this calculation for any type of advertising you plan to do. Let's assume you are paying your web services company $1500 per month to maintain your website. The gross margin of your company is 45%. What is the breakeven dollars that must be generated from your website each month to cover the cost of the maintenance?
The breakeven sales that must be generated is $1,500/45% or $3,333,33 per month. To be fair, let's look at an entire year because of seasonality. The breakeven sales volume from your website is $40,000 per year. Can your website do this?
The only way to answer this question is to track where your leads and sales are coming from. If a new customer contacts your company, you must ask the question: "How did you find out about us?" Or, "How did you hear about our company?"
If the customer says a web search, then you track the dollars generated from that customer and attribute them to the website.
So, before you make any advertising purchase, determine whether you can at least break even on that purchase. If you can’t earn what is necessary from the advertising expenditure, then don’t make the purchase.
I have a deep understanding of Profit and Loss Statements and Balance sheets - and I can explain them in simple, easy to understand language.
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