Calculating and understanding ROI on advertisements

Massimo GaetaniUntil a few years ago owners of small businesses could buy advertisements on a handful of possible media and channels; for several decades the choice was limited, quite obvious and often cost effective.  At that time if we considered advertising on the local press the choice used to be made of one or more local newspapers plus perhaps the parish magazine and a few other publications.  Fast forward to 2014 and, even a small city like Cambridge has at least half a dozen free lifestyle magazines that have been added to the above list.  Each of them is funding its very existence by selling adverts, encouraging local businesses to believe that their advert on that magazine will effectively help their business to sell more…

An old saying about marketing expenditure states that: “50% of my Marketing expenditure is usually lost; unfortunately I don’t know which one”.  That was a fair and acceptable comment before the advent of Pay Per Click (PPC) adverts or banner ADs with measurable click through rate.

How do we measure the Return of Investment (ROI) for that specific advert? Better how can we evaluate, before spending money, that the advert we are being offered is worth the money they ask for?

In my experience some of the people selling adverts tend to come out with very improbable numbers about how many people are reading their publication and the likelihood of one of them actually buying something from us.  A large number of optimistic assumptions are made when mentioning numbers and probability of success; circulation (number of copies sold or distributed) gets multiplied by opportunity factors:

  • if a magazine is posted in a letter box of course it will be read by every member of the household
  • if the same magazine is left in a pub most people having a drink will eventually read it and so on

The fact that we are totally bombarded by adverts from any direction has created in us consumers a nearly total insensitivity to adverts, whether they appear on magazines (please pause reading this article right now and quickly list the 3 most significant brands or adverts you saw in the last magazine or newspaper you read), websites (please repeat the same exercise as before on the last website you were browsing), social media (please again) and street adverts; frankly we must hope that people do not watch adverts while driving and it’s easy to spot people messaging or checking social media on their mobile while walking on the street.

As owners of small business we should really pay attention before spending hard earned cash into a random advert in the hope it will generate extra sales; in my experience most of the times it won’t.

Well presented figures are often helping sales people to make their case stronger.  Here is a story about a phone call I received last week; a man who was trying to sell adverts for our clinic onto doctor’s surgery appointment’s cards.  His pitch was simple “we sell adverts for companies like yours to go on doctor’s surgeries appointment cards”; sounded simple and neat.  Then the pricing “£600 per year, minimum 2 years and we are distributing, on average, 12000 cards per year”.  So, I quickly calculated, £50 per month for 1000 cards over the same period; it seemed high at about 5p per advert.  When I told him I would need to generate at least 10 inquiries per month (that presumably would bring 4 clients). Expecting a click through rate of 1% that for a totally unsolicited advert is way too much and it just won’t happen.  He adopted a defensive pitch coming out with the fact that his company advertise on their same cards and get 60 inquiries per week or about 250 per month; at this point many people would say: “wow” and sign. However when I asked a couple of extra questions I found out that they advertise in 1300 surgeries and I quickly confirmed my case against his numbers; 1300 locations distributing 10000 cards each per year makes it 13 million cards or about 1.08 million per month. In short we can calculate that 250 inquiries out of 1.08 million means a mere 0.023% click through rate it works out to be about 50 times lower than what he offered with his advert,  way too low to be considered.

Modern technologies allow us to gather more data, for free, than we could even have though before.  This can help us consumers and customers to take educated decisions about business proposition that before we should have trusted our gut feeling or, worse, the sales person whose only interest is to close a deal.

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