It’s not always clear how much an organization spends on advertising. In some cases, companies may have a hard time telling which activities are most valuable.
In addition, organizations may not have the right tools to determine their advertising spend. For example, some advertising platforms are not as helpful as they could be.
And it’s not always easy to determine the return on investment for an advertising campaign.
However, it’s important to understand the value of advertising and how businesses can increase their ROI on advertising.
What Is Advertising?
Advertising is a business practice in which companies pay to reach potential customers, whether that be through traditional advertising, digital media or other channels.
Companies spend money on advertising to attract customers and increase sales.
Companies can use advertising to promote their products or services, raise brand awareness and to sell products.
Advertising can be direct or indirect.
Direct advertising is when one company pays another to promote its product or service.
Indirect advertising is when one company places its product or service in a media that is already popular, such as a newspaper or television.
Traditional advertising is an indirect form of advertising.
What Are the Cost-Benefit Ratios?
According to a Harvard Business Review study, organizations can increase their profit by up to 50% by investing in an advertising campaign that increases awareness and engagement.
However, that profit increase is only possible if the return on advertising is greater than the cost.
To measure the return on advertising, organizations consider the cost of the advertising campaign, and then determine how much they will benefit from the campaign.
The better the return on investment, the more profit the organization will earn.
The Return on Investment
One common mistake that companies make when calculating the return on investment is that they don’t account for the cost of the advertising.
For example, if a company spends $100 on advertising for one month, and the return on investment is $1,000, then it will make money on that investment.
The question is, how much does that $1,000 return on investment, specifically for this particular company?
The answer is that the return on investment is calculated on the cost of the advertising and the number of customers that a company receives as a result of the advertising campaign.
For example, if the organization spends $100 on advertising, and receives 20 customers in the month, then the return on investment would be $200.
But that may not be the best example of a return on investment.
For a particular company, the return on advertising is calculated differently than the return on investment.
The Return on Advertising Is a Percentage of Sales
To determine the return on advertising, organizations need to know the average sales of a particular company.
Then, they can determine the number of customers the company receives as a result of its advertising campaign.
In the example above, the organization is advertising on a digital platform, so the number of customers it will receive is irrelevant.
However, if the organization is advertising on a TV channel, then it will receive a higher number of customers, as that is the typical number of people who watch television.
The Return on Advertising Is a Percentage of Customers
Advertising is an expenditure, not a profit center.
For example, if the organization decides to spend $100 on advertising, and each customer they receive is worth $5, then advertising is a waste of money.
If the organization spends $1,000 on advertising, however, then each customer it receives is worth $20.
In this case, advertising is a wise investment.
This is because the company will receive more customers than it would if it didn’t advertise.
The Return on Advertising Is Calculated by the Cost of the Ads and the Number of Customers
In the previous example, the organizations would have made $200 from their advertising.
However, if the organizations decided to spend $200 on advertising, and received 10 customers, then the return on investment would be $200.
In this case, the amount the organization can make from advertising is limited by the amount it pays for the advertising.
Advertising is a cost, not a profit center.
What is the Average Cost of Advertising?
There is no set price for advertising.
Advertising companies typically set a price for advertising based on its cost, and a fixed amount of profit that the company expects to make from the advertisement.
For example, if the cost of an advertisement is $200, then the advertising agency sets a price for the advertisement and sets the profit share based on the organization’s expected profit.
The actual cost of the advertising campaign will depend on the type of advertising and the audience.
For example, a company might spend $200 on a TV campaign, and receive an average of 2,000 viewers. If the organization expects to make $200 from the advertisement, then the return on advertising would be $200.
However, if the organization expects to make $400 from the advertisement, then the return on advertising is $400.
Advertising is not a good investment if the company expects to make a loss from the advertisement.
The Average Cost of Advertising Is Not the Cost
Advertising is a cost that an organization pays to get exposure to a potential customer.
However, to calculate the average cost of advertising, the organization must include the cost of the advertisement, and the cost of the customers it receives as a result of the advertisement.
Then, the organization can calculate the return on advertising as a percentage of the cost of the advertisement and the number of customers.
How to Calculate Return on Advertising?
To calculate the return on advertising, organizations need to know the cost of the advertisement and the number of customers the company receives as a result of the advertisement.
The bottom line
While advertising is useful for increasing brand awareness and generating leads, it is not a good investment.
The return on advertising is calculated as a percentage of the cost of the advertisement and the number of customers that will receive their money back from the advertisement.
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