Good question, seems to me there are too many variables in net/gross profit to measure roi. How can you be sure it is advertising affecting and not something else?

Are you just trying to define if those types of advertising are profitable or maintaining/increasing sales?

You need to track all those things by recording where your leads are coming from. Maybe determine which avenue brings in more profitable jobs?

Does that make sense, not sure if I understand your question.

 

One way to calculate your advertising budget is to make it a percentage of your past year's gross sales. In this case, 2-5% is fairly typical for an ad budget for most businesses. Of course, if you are entering the market and you are looking for some quick recognition then those numbers would of course increase.

If you did $250,000 last year then your budget would be anywhere from $5000-$12,500 for the coming year. Does that seem reasonable to you?

You could be spending $20,000-$50,000 if you are doing a million dollars worth of business.

Of course, the longer that you are in business and if you aren't planning any major expansion of the business then you could actually see a decrease in the percentage of necessary advertising as your word of mouth business increases.

We have been in business for over twenty years and our current ad expenditures are just shy of 2% of our gross sales. I think we could be spending more. We are looking to double our residential crews from 5 to 10 over the coming year so we'll have to increase advertising in order to bring in the necessary sales.

 

How do all of you calculate if advertising, bni membership, yellow pages, fliers, or any other form of marketing/advertising is profitable?

I don't think that "profitable" is the right word to use. The right term is "return on investment". This is calculated by dividing the cost of the advertising by the revenues it generated. You can then compare this to your budget and benchmarks.

Brian Phillips

 

How do all of you calculate if advertising, bni membership, yellow pages, fliers, or any other form of marketing/advertising is profitable?

There ya go:

But you can't do this until you're able to separately track each investment. That's why it's important to determine where each sale came from.

So for example: If you spend $100 on PPC advertising and generate $1000 in revenue, then your ROI will be as follows:
($1000 – $100) / (100) = ($900) / ($100) * (100%) = 900.00%

900% is essentially saying that from your original investment (100%), you've gained nine times that (900/100) in revenues.

 

I guess the problem i have is that using gross sales in the above equation does not tell the entire story. would gross profit or net profit be a better number for the above equation?

 

Pure ROI expressed as a percentage of gross sales. Historically for me, I spend 10% on advertising for print and media. So for me, for every dollar I spend, it is successful if I get an ROI of 10.

I hear so many guys say "I broke even on that ad". I always ask what they mean by that and invariably the answer is something like, "I spent a grand and did $1000 in work".

That is a 100% advertising budget. That means materials, labor, and all direct and indirect expenses came out of their pocket. They paid for the privilege of doing the job. Even the advertising people don't get it when I tell them I need to gross $10,000 for every g I spend. They always ask the same question... why so much?

 

i have been told by a business coach to view roi based on how much gross profit there is since the advertising adds on to the base income your company receives and that assumes that all overhead expenses are covered in the base work you have and any additional jobs by a new advertising campaign would be the gravy on top of that.

i feel this does not work for my business, since we do not have a customer base that necessarily paints every year (at least if you are residential) so advertising may be needed to meet that base gross sales that pays all fixed overhead.

i tend to view it more like pressure pros. for me, if i get a 10:1 in sales for each advertising $, the gross profit would approximately equal the advertising expenditure, which is what i would like to see at a minimum.

i have been trying to look at the numbers for stuff like yellow pages and bni based on that view and they are lacking. if i look at ( gross sales-cost of ad)/cost of ad, then it looks fine (or at least not as bad). if I look at (gross sales- cost of ad)/cost of add, then it falls between the two obviously.

i am just trying to check my perspective on how i view these things.

 

If you analyze your marketing on the basis of net or gross profit, you are introducing other variables into the equation. For example, if a job takes longer than estimated, your labor and overhead costs will be higher. Your gross and net profits will be lower, and the marketing will look like a poor investment. But the higher costs had nothing to do with the marketing.

To properly analyze our marketing, we shouldn't consider these other variables.

The ROI is the most effective way to analyze our marketing. However, sometimes it can be a little misleading. For example, I've had situations where a piece generated few leads, but I got one very large job from it. The ROI is very good, but it is not a situation that is likely to continue. As a part of my analysis I also look at cost per lead, closing rate, and average sale. These numbers give me a more complete picture of the effectiveness of the marketing.

Brian Phillips

 

There are definitely multiple ways to analyze numbers and you hit on a key factor.. you have to know those numbers. At this stage of the game for me, all percentages are established. Its rare for a time expenditure to be underestimated because I have had nearly a decade to constantly evaluate output based on square footage (with difficulty factors added). I know my material costs, amount of gas used, my salary is constant and I can project closing ratio of leads accurately. Its funny how averages are.. They generally, well... average out. A month with higher than normal growth rate is averaged the next month with below average sales. Without droning on, my marketing/acquistion cost comes out to about 5% of gross (when I factor web leads and referrals which have killer ROI obviously).

Something I may do differently than some is use real dollars to project marketing budget. It is the best way for a new company to make sure its advertising machine stays rolling and I have just stayed with it. If I have an $80,000 April, that means I can spend $8000 in May. If I don't use it all in May because referrals are heavy, the money is banked for use later. Staying disciplined to this helped me in the long run. In the beginning it hurt because I was allotting 20% to advertising. Its difficult when you have $1000 in the business account to set aside $200 for your next advertising venture but it is the best way to grow.

 

^^^^ Up kinda late arent you???

 

No. Up a little early.

Brian Phillips