Measuring Advertising Results
Are your Promotional Activities as Successful as they Should be?
Many small businesses spend money on advertising without knowing whether it's effective or not. Here's one way of measuring results.
Have you ever thought that measuring the success of advertising is difficult? It can be, but it's made easier with the application of some simple principles.
Too many companies advertise without giving enough thought as to why or how they’re doing it and then have trouble tracking the results afterwards. The following three steps will help advertisers make sure they get the most out of their budget.
- Work how your customers are worth to you.
- Calculate how much you are willing to spend to find new customers.
- Create a system for measuring results.
Measuring the Value of a Customer
Identify the total profit a customer generates during their time with you. For example, if a customer buys a product from you at £100 giving you £20 profit and they buy it every quarter you’ll make £80 per year from them. If, on average, they buy from you for three years before dropping out then they have generated £240 for you.
You need to allow an element for averages and future discounted costs, so you could say each new customer is worth £200 profit for you over the longer term.
Calculating the Acquisition Cost
Your ‘Acquisition Cost’ is quite simply the cost of your advertising divided by the number of sales. So, if you spend £1,000 and make 50 sales, you have an Acquisition Cost of £20.
Using the example above, if your profit is £20 from each of these sales then you could argue that the advert was wasted as no profit was made. However, as we’ve seen, each customer is actually worth an average of £200 to you so it’s probably a small price to pay.
Creating a Measurement System
These calculations work best when you have a measurement system in place and a database. It doesn’t have to be complicated, for example when a customer calls up and says they saw your advertisement you ask ‘which one?’ and then record it. It’s then a relatively simple exercise to work out how much your advert cost and how many people responded to it.
Once you start doing this you very quickly build up a picture of your most effective advertising by comparing the Acquisition Cost of each. If you can compare the profit from customers gained through different adverts you’ll see that sometimes a media with higher Acquisition Costs actually provides more profitable customers.
Awareness Advertising
Using the Acquisition Cost technique can create an excellent picture of what advertising works for you and what doesn’t, but there will be some occasions when your advertising is used to purely generate awareness.
If you choose to sponsor the local school football team, for example, don’t expect to make a lot of money from it or be able to measure it in terms of Acquisition Cost. However, the additional awareness it creates can make the initial selling job easier, leading to reduced Acquisition Costs in the future.
This is not necessarily a bad thing, but you must be aware of why you’re doing it and how much you spend on it. Use the techniques in Measuring General Advertising to help you. There are also other types of non-measurable advertising covered in Can Advertising be Measured?
