Don’t we all want to know how effective our advertising is? Is there a minimum we have to spend? Is there a maximum beyond which we’re just wasting money? Is there an optimal promotional mix?
I use three metrics to help answer these questions: What is the advertising budget as a percentage of gross sales? How much in gross sales are generated for every $1,000 spent on advertising? And, how many leads are generated for every $1,000 spent? If you set up your financials so you can track these three figures, you will have the basis for finding that advertising sweet spot — not too little, not too much, but an amount just right for your market and your business.
Of course, as we consider how much one dealer spends compared to another, we must recognize that external forces have an impact. It is a lot more expensive to purchase a newspaper ad in Philadelphia than it is in Fargo, N.D. Additionally, if you have a lot of competitors in your market, you may have to spend more on advertising than those with few competitors. Even with these caveats, these survey results survey suggest that for most dealers an average advertising expenditure of 5 percent of gross sales is typical.
Now, consider the metrics for evaluating your advertising return on investment: gross sales and leads generated for every $1,000 spent on advertising. The table shows a sampling of the survey responses I received; they anonymously highlight the best, the average and the weakest results from advertising dollars spent by brick-and-mortar spa retailers.
Here’s the first thing I found interesting. Look at the “Leads Generated/$1,000 of Advertising” row. If you take out the extremes, you’ll find that two-thirds of the respondents generated right around the average of 5.7 leads for every $1,000 spent on advertising. And this held for all the surveys I received, not just the few represented here.
Dealer A generated lots of leads. Look at how it spent its money. Almost half was spent on home shows, state fairs and special events. By their very nature, these events generate a high number of leads: almost 10 per $1,000 of advertising, which is the best of the group. But then look at the revenue being generated; it’s the lowest of the entire sample. Please don’t misunderstand; I cannot say this company is spending its budget incorrectly. But this highlights the fact that generating lots of leads does not necessarily result in lots of sales. Furthermore, as you know, participating in home shows and fairs is expensive — that’s why Dealer A spent as much as everybody else when its top line is only 40 percent of the overall average. Spending a little more in some of the other media outlets might produce better results.
The company in Column H brings up another question: Is it possible to spend too much? I’m not saying that’s necessarily the case with this company, but when the revenue generated is very close to the average and the leads being generated are less than 30 percent of the average, it is a reasonable question to ask. Just because you have it doesn’t mean you have to spend it.
Is there an exemplar in this sample, a company we can hold up as the perfect example? I’ve been studying numbers like these for many years, and if there’s a silver bullet — a perfect marketing campaign — I haven’t been able to identify it. But I do feel comfortable drawing a few general conclusions, and this sample illustrates them.
Companies that spread their message through multiple media channels get the best and most consistent results. Concentrating your efforts in just one or two areas at the exclusion of others runs the risk of not reaching all of your audience. The phrase “moderation in all media” comes to mind, however, there is an exception to this general rule. You can see that three of the eight companies did no Yellow Pages advertising at all and two others spend a small percentage in this area. This represents a trend we’ve all observed over the last several years: Yellow Pages no longer has the impact or response rate they once did. You would be safe in cutting that expenditure to the bone. As an aside, I’m not as certain this is true for pool companies. Believe it or not, studies have shown that a presence in the Yellow Pages (albeit much reduced) still works for pool companies, but not so much for spa retailers.
No two situations are ever alike, and markets are different. There is no perfect formula for how to use your advertising dollars, but consistent monitoring with a simple system like the one used here, or one that you devise yourself, is critical to making smart and informed decisions that help you continue to grow and increase your profitability.
As you look over the data collected here, I encourage you to draw your own conclusions. If you have questions or would like to explore your observations in greater detail, I would encourage you to send me an email. I would be glad to help you and learn myself as we explore this ever changing and dynamic business challenge.