Three Sure-Fire Ways to Reduce Your Advertising Costs

Monday, June 21, 2010 Posted by John Tabita 1 comments
Everyone in business want to decrease their costs, so here are three sure-fire ways to reducing your advertising costs:

  1. Increase your close ratio
  2. Increase your response rate
  3. Decrease your cost per month

In my previous post, we looked at two ficticious business owners and compared how the cost of their advertising stacked up against these three factors. Let’s see how Advertiser A would fare by improving in these three areas.

Increase Your Close Ratio
If Advertiser A could close two people a month, instead of just one, he would more than double his return on investment and cut his cost-per-sale in half. (Although this doesn’t involve increasing the cost of your adverting, it may require spending money on sales training for yourself or your sales staff.)

Increase Your Response Rate
Even if Advertiser A’s close ratio remained the same, he could achieve the same results as above by doubling his response rate. If six people a month called instead of just three, he’d close two sales a month, increasing his return and cutting his cost-per-sale.

What most businesspeople don’t want to hear is this: the only way to increase your response rate is to increase your advertising. For direct mail, that might mean a larger mailing. On the Internet, it would mean achieving a higher ranking on the search engines. For yellow pages advertising, it means a larger ad. We know from independent research that just doubling the size of a quarter-column ad produces 5 times the response, and quadrupling its size produces 15 times the response.

Decrease Your Monthly Cost
Many people who want to decrease their advertising costs do so by decreasing their advertising. Unfortunately, this is the only method that negatively affects your bottom line, because it decreases your response rate and ultimately, your sales.

The True Cost of Your Advertising

Monday, June 14, 2010 Posted by John Tabita 1 comments
If you are doing any sort of advertising then each month, year or whenever it’s time for the next campaign, you are faced with a choice: continue with what you were doing, increase your advertising, or decrease/cut your advertising. When it comes to reducing costs, most people naturally focus on the actual cost of the thing, but you don’t cancel your phone service simply because your telecom costs are too high. You might consider a reduced service plan, but not without taking into account exactly how that might negatively affect your business, right?

Advertising is no different. The goal of marketing is to get responses and ultimately sales. So you cannot look at your advertising costs outside of the context of: (1) What your current advertising produces in terms of responses and sales, and (2) What the potential negative effects of reducing that advertising would be.

Most people decide to cut advertising because they believe or perceive that it’s not working. Assuming that’s not the case with you, here’s how to make the most from your advertising dollars.

Let’s imagine that business has taken a downturn, so you’ve decided to increase your advertising. If you’re going to spend more money on advertising, the increase must justify its cost by producing better results. This means that the basis for measuring the cost of your advertising must never be cost per month. Instead, it must be a results-oriented measurement, such as cost-per-sale and return on investment.

Return on Investment (ROI)
The first factor you must consider for any type of advertising is Return on Investment – will my return exceed its cost?

Advertiser A pays $25 a month for a bold listing in the Yellow Pages and gets an average response rate of about 3 people a month. Since he closes an average of 1 out of 3 calls, his advertising results in 1 sale a month. His average sale is $100, so by deducting the $25 cost of his advertising we see he’s made $75 from his bold listing.

Advertiser B has a Yellow Page display ad for which he pays $150 a month. Advertiser B also closes 1 out of 3 calls, with an average sale of $100. But the monthly response rate from his larger ad is 30 people, resulting in 10 sales. So when we deduct his monthly advertising cost from $1,000 in sales, he makes $850 a month.

Since both are getting a positive return on their investment, each adverting program could be considered a success. But would it surprise you to know that, although Advertiser A’s cost per month is less than B’s, his advertising is actually more expensive? Here’s why:

Cost-Per-Sale (CPS)
We said that Advertiser A’s bold listing results in 1 sale a month. This means that the cost-per-sale is $25. (One sale a month, for which he pays $25 a month.)

Advertiser B, however, is receiving 10 sales a month, for which he pays $150, so his cost-per-sale is only $15. Although both are getting a positive return on their investment, Advertiser A’s ad is more expensive, because he’s paying $10 more per sale than Advertiser B, even though he’s paying less per month. Make sense?

Remember: Cost-per-Sale and Return on Investment are the true measurement of what your advertising costing you – not cost per month!

What Not to do in a Sales Call

Saturday, June 5, 2010 Posted by John Tabita 0 comments
It’s important to know your product, as this video so amply demonstrates:

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Marketing Your Way Through a Recession

Wednesday, June 2, 2010 Posted by John Tabita 1 comments
Studies show that businesses who maintain or increase their marketing during a recession experience higher sales growth – both during the recession and immediately following.

During a recession, money gets tight and fewer people are buying. If both you and your competitors continue to advertise, you wind up competing even harder for the few customers that are left.

That’s the bad news. The good news is that, even though there are fewer customers, there are also fewer companies marketing to them, because many of your competitors will cut back their advertising. Advertising during a recession gives you a unique opportunity to win their customers and gain market share.

Here’s an actual example from our nation’s worst economic downturn. In 1929, rival cereal makers Kellogg and Post fought to dominate the packaged cereal market. When the Great Depression hit, Post did the predictable thing – they cut back on advertising. But Kellogg doubled their advertising spending and aggressively marketed their new cereal, Rice Krispies. By 1933, as the economy tanked, Kellogg’s profits had risen by nearly 30 percent. By the end of the Great Depression, Kellogg was the dominant player – and remains so to this day. Post never regained what it lost.

Don’t Base Your Advertising Budget On Last Month’s Sales – Or Lack Thereof
A research study by McGraw Hill/American Business Press revealed that companies who maintained or increased their marketing and advertising during the 1981-82 recession experienced an average of 256% higher sales than their competitors who reduced their marketing over the same period.¹

What’s more, these sales figures continued for the next three years after the recession had ended!

A similar study conducted over same period by research firm Meldrum & Fewsmith concluded that aggressive advertising did not only grow revenues; it even increased profits.²

In 2001, a study comparing marketing practices during the 2001 recession determined that aggressive recession advertisers increased market share 2½ times the average compared to all businesses in the post-recession.

Missing The Boat For Fear Of Sinking It
When hard times hit, however, most companies behave more like Post than Kellogg. They batten “down the hatches” and wait for better times to return:

Uncertainty is always a part of business, but in a recession it dominates everything else: no one’s sure how long the downturn will last, how shoppers will react, whether we’ll go back to the way things were before or see permanent changes in consumer behavior. So it’s natural to focus on what you can control: minimizing losses and improving short-term results. And cutting spending is a good way of doing this…

Unfortunately, you can become so focused on not “sinking the boat” by cutting spending that you end up “missing the boat” by not seeing the opportunities that a recession can bring – opportunities to:

  • Experience higher-than-average sales
  • Grow profits
  • Increase market share
  • Leap from the bottom of your industry to the top

Advertising during a recession provides a unique window of opportunity to… equity, solidify your customer base, gain new customers; and make inroads on your competitors who have cut their advertising during the recession period. This window of opportunity is created by the understanding that advertising is an investment, not an expense.

Do you have the nerve to try? Most companies don’t.

To paraphrase the Harvard Business Review³, If you’re courageous enough to stay in the fight when everyone else is playing it safe, you can bring about dramatic changes your market position. Your advertising should not be regarded as a drain on profits, but as a contributor to profits. It’s not an unavoidable expense – it’s a means of achieving your objectives.

At the risk of being redundant, I’ll say it again: Your advertising budget should always be based on your company’s goals, not last month’s sales.

¹The McGraw-Hill Companies’ Laboratory of Performance Report 5262.1: “Business-to-Business Companies that Maintained or Increased Their Advertising Expenditures during the 1981-1982 Recessions Generated Higher Sales Growth than Firms which Eliminated or Decreased Advertising,” June, 1987.

²American Business Press, Inc. “How Advertising in Recession Periods Affects Sales,” ABP/Meldrum & Fewsmith Study, 1979.

³Dhalla, Nairman K. “Advertising as an Antirecession Tool,” Harvard Business Review, Jan/Feb 1980.
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