A local business owner asked me the other day: If she doubled her advertising budget, could she expect to double her sales?
What do you think? Yes or no?
Well, instead of giving her the typical answer of the desperate media salesperson – “Sure you can, just give me the money!” – I asked her to first answer the following three questions that Roy H. Williams asks all of his clients:
- What percentage of your business comes from repeat and referral customers?
- What percentage of your business is location driven?
- What percentage of your business is wholly attributable to your advertising?
The answers to these three questions determine the likelihood that doubling an advertising budget will result in doubling sales.
According to Williams, author of the Wizard of Ads, the reality is that, for most companies, 70 to 75 percent of their business comes from repeat and referral customers. Another 5 to 15 percent is location-driven (meaning a purchase decision is made based on the proximity and convenience of the selling business), while 10 to 20 percent of business generation is driven by advertising (of any kind).
So, let’s be realistic. Are you going to double your sales by doubling your advertising spend? Not likely.
However, the business owner I spoke with does have a good chance of doubling her ad-driven customers by doubling her advertising budget. For this portion of business generation, advertising will heavily influence sales, particularly if she is effective at connecting with consumers who are unaware of the business and who have never given her the opportunity to earn their business.
Maybe doubling sales is too aggressive, even among this the ad-driven category of sales generation. A lot depends on what the business is selling and to whom. But any increase of new ad-driven customers can make a big impact on any type of business.
What’s the value of a new ad-driven customer in your business category? Once you calculate that, you are on your way to determining your optimal advertising budget.
How to Determine the Value of a New Customer
Here is a little “back-of-the-envelope” math to get you started, using a specific business category in mid-Michigan as an example.
In this example, let’s establish that each new RV/camper customer is worth $85,183 in Lansing-East Lansing, MI (according to Sales Fuel 2017). Let’s further assume that advertising will generate 10 new sales. The illustration above reveals that this would account for $851,830 in additional revenue over a 10-year period. How much do you suppose that additional revenue is worth pursuing via a strategic advertising budget?
While the answer might be different for each business owner in each category, you can see how doing some simple math can work to justify and quantify your target ad budget.
Whatever your industry, the bottom line is this: There are consumers in your market right now who have a need for the products or services you sell but who are not even aware of your business. These “ad-driven” new consumers almost certainly represent significant sales growth for your business.
What would 10 new ad-driven customers be worth to your business?
We have many tools at your disposal to help you calculate an expected return on a potential advertising investment. If you would like access to any of these free tools, please do not hesitate to call me at 989-752-8161 or write me at email@example.com, and I will send them your way!