There are so many ways to advertise. How do you pick one? One way is to consider the advertising return on investment or ROI. ROI is a measure of the effectiveness of your advertising. How much you made compared to how much you spent or invested. While the ROI is usually talked about qualitatively rather than quantitatively, you can actually calculate a number for ROI. Your ROI can be calculated by dividing your sales by your advertising costs. Sales can be in dollars or, if you have a single product, in number of units sold. If the purpose of advertising is to generate inquiries, then your advertising ROI would be calculated by dividing the number of inquiries by the cost of advertising.
If you have been advertising for awhile, use actual data to calculate your ROI. If you are just starting advertising, use estimates of sales for now and be sure to collect data so that you can calculate your actual ROI. If you are using multiple advertising methods, you will need to track sales or income as a result of each type of advertising. Ask prospects that contact you how they heard about your business. You can also include a code with your advertising and ask prospects to include the code with their order or inquiry. Codes work well to track results from multiple advertising campaigns that are occurring concurrently.
The most effective advertising gives you a high ROI. You get a high ROI if you spend very little to advertise and still get sales. You also get high ROI if you have high sales from your advertising efforts. If you calculate a value for ROI using dollars for both sales and advertising cost and it is less than one, you are losing money on that advertising effort. Make a change.
When comparing two or more advertising efforts, you should continue with the advertising method and approach that is giving you the highest ROI. A decreasing ROI over time means you should consider changes in your advertising. Changes to think about would be advertising in a different market or changing the offer in your existing market. If you want to expand your business and your ROI has been flat over time, changes in your current offer may increase sales. Expanding your market may also bring in more sales. However, advertising to new markets may change your advertising costs as well. Be sure to account for that in your ROI calculation.
The ROI in advertising can also be used to make business decisions not directly tied to advertising. If you offer multiple products or services, you can compare the ROI for multiple products and use that result when making decisions about continuing to offer a specific product or service. If the ROI for blue widgets is significantly higher that the ROI for white widgets, you may decide that it is best for your business to stop selling white widgets. When comparing ROIs for different products or services, be sure that you are comparing apples to apples. In other words, only compare ROIs if you used dollars of green widget sales and dollars of white widget sales. You can not compare ROIs if you used numbers of green widgets sold but dollars generated by white widget sales.
Be sure not to compare your ROI to the ROI of another company. There are too many variables across companies to have a meaningful result. Other than wanting your ROI to be greater than one for ROIs calculated using sales dollars, there are no magic ROI values. Try different advertising approaches, compare the ROI, stick with the advertising that gives you the highest ROI, make changes in your marketing if the ROI over time decreases or remains flat and you want to expand. Knowing your ROI in advertising will help you make sound business decisions.
