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 noticed, but for most businesses, effective advertising is critical. But effective advertising means more than just 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.

The process of measuring advertising effectiveness starts with a simple formula: Return on Investment. Return on Investment (ROI) evaluates cost against return.

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, 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. With a simple calculation, you can compute your ROI:

$5,000 - $2,000 = $3,000; $3,000 / $2,000 = 1.50, or 150%. Your ROI on the direct mail campaign was 150%.

Though triple-digit ROI is not unattainable, double-digit ROI is often more the norm. Financial factors influencing or affecting ROI can be many, including offering product discounts.

Even with a formula, evaluating advertising effectiveness can still be challenging. For example, 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?

If you’re only interested in measuring a campaign’s overall effectiveness, 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 of measuring advertising effectiveness is to tie specific items or activities to specific forms of advertising. Your television ads may be of a general nature, 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.

The key to evaluating advertising effectiveness is to determine where sales and revenue originated, at least in terms of the advertising you place. Try to tie unique items to each type of advertising so you can determine the impact of each method.