Advertising is certainly an important investment that can lead to more sales. So, how do you know if your advertising budget is on target? And at what point is advertising just a waste of money?
Finding the answers to these questions isn’t always easy. But if you carefully track the results of your ads, you should be able to tell if the money you are spending on advertising is worthwhile. Here are three key metrics to keep your advertising budget on target.
1. Your Ad Spending is Generating Revenue
The most important way to determine if you are spending the right amount on advertising is to make sure that you have a positive advertising-to-sales ratio, which is really just a fancy way of saying that all of your advertising dollars are leading to sales. To do that, you need to track responses to your ads.
A simple and easy way to track this is to include a discount or giveaway, with either a redeemable coupon or a promotion code that must be presented at the point of sale. The discount or freebie serves as an incentive for your customers to mention the ad an allows you to start keep track of how many sales your advertising is generating.
Other ways to track your ad results is by testing one variation at a time — for example, trying out different creative or media outlets until you find the advertising mix that maximizes your investment. The bottom line is that if you increase your ad spending, you should see at least a proportional increase in revenue.
2. Your Customer Acquisition Cost is Less Than Revenue Per Customer
Do you know your Customer Acquisition Cost (CAC)? If you don’t, just add up all your sales and marketing costs for a specific period (perhaps a month). Then divide by the number of new customers who bought from you during that period.
Compare that number with the average amount of revenue each new customer brings in. From that you should get a sense of whether your investment in advertising is paying off.
If it is, great! If not, you’ll know that you need to make some changes to your advertising strategy. Perhaps becoming more focused on a specific niche market rather than advertising more broadly. The ultimate objective is for each new customer to spend more with your business than you spend to get them in the door.
3. The Lifetime Value of Each Customer is Factored Into ROI
If your business truly consists of one-off transactions, then once you have calculated your CAC and your average sale, you’ll know right away if your advertising costs are generating a positive return on investment (ROI). But for most businesses, a good percentage of their customers buy from them again and again.
One great example is restaurants, since many diners will return to their favorite eatery often. The more repeat customers your business has, and the more each of those customers spends on every visit, the more you can spend to entice that customer to walk in the door in the first place.
In fact, some restaurants offer an incentive — such as a free drink — to get people to try them out. Knowing that while they might lose money on that first visit, the revenue from future purchases will make that investment profitable, since the CAC for all future meals is zero. So when you consider the costs of your advertising, it is important to consider the larger picture of what each customer will ultimately spend with you over time.
Despite all that has been written on the subject of advertising over the years, there is still no agreed upon dollar amount or percentage that guarantees success. Continue to test different advertising strategies and tracking the results until you find what leads to the best ROI for your small business.