The definition of a Return on Investment (ROI) is the gain or loss generated on an investment relative to the amount of money invested. ROI is usually expressed as a percentage. This post will help you learn how to calculate an ROI on your advertising.
For example, you buy some stock in a company for $1,000. One year later, you sell that same stock for $1,200. You get your $1,000 initial investment back, plus an additional $200. You made a 20% profit or a 20% ROI. Return on investment is usually directly related to the amount of risk involved. Treasury Bills issued by the U.S. Government are considered relatively risk free. In 2019, 10-year Treasury Bills were paying approximately 2.5% interest, or a 2.5% ROI, provided you are willing to invest your money with the U.S. Government for the next 10 years.
On the other hand, a high-yield, high-risk security can pay a higher ROI provided you are willing to risk losing some or all your original investment. The ROI is most always directly related to the amount of risk the investor is willing to take. High risk can mean high returns or possibly a major loss.
Advertising is technically not an investment. It is a business expense. In accounting, the money spent on advertising is an expense on the income statement, sometimes called the Profit and Loss statement or the P&L. Investments, like a building, vehicles or manufacturing equipment, are recorded as assets on the balance sheet. You won’t find advertising on a balance sheet. So, don’t make the mistake of telling your prospect that, “Advertising isn’t an expense, it’s an investment!” It simply isn’t true.
That doesn’t stop business owners from trying to measure an ROI on their advertising expense. It’s only natural to hold every penny you spend accountable to the bottom line. If you spend money on advertising, you want to see that you get something back in return. This desire for accountability, or instant gratification, is what has driven the popularity of digital advertising. But instead of measuring the ROI in terms of increased gross sales, too many business owners have become consumed with their cost-per-click (CPC) or cost-per-view (CPV) and other metrics and not on the overall increase in sales.
On their Q4 Earnings Call in 2017, the world’s largest advertiser, Proctor and Gamble, revealed they had cut up to $200 million from their digital advertising spend in just six months because of bots, brand safety concerns and ineffective ads.[1] The consumer products giant indicated they had moved those advertising funds to Radio and TV which offer much more audience reach, and improvements to the company’s ecommerce efforts.
Six months later, Proctor & Gamble reported their strongest quarterly growth rate in five years.[2]
That is the true measure of a Return on Investment, year over year revenue growth. It must be year-over-year to take into consideration a host of external factors over which you and the business owner have no control.
Advertising spreads the business owner’s message around to thousands of people. Consistent advertising builds awareness with thousands of people. Brand awareness can sometimes be considered an asset. You might find it labeled “Good Will” on a balance sheet.
The primary goal of advertising is to make consumers think of one brand over the brand’s competitors. You can measure consumer awareness of different brands. Mindshare is a marketing term that describes the amount of consumer awareness of a certain company, brand or product. Mindshare is a precursor to market share. The customer must know about the company, brand or product before they can make a purchase. You can tell your prospect, “They gotta know you before they need you.”
It is possible to have some negative mindshare in the market, especially if there has been a serious event involving the company, brand or product. Poorly crafted and annoying advertising can also contribute to negative mindshare. Researchers can also measure heart share, the amount of positive or negative mindshare.
While advertising is technically an expense on the income statement, growing the mindshare and positive heart share of your prospect’s business will ultimately lead to market share growth.
Instead of investing in public company, when a business
owner buys advertising from you, they are investing in their own company over
which they have great control. They control their inventory, hours of
operation, employee training and pricing. The awareness your advertising
provides will help them build mind share which leads to market share growth and
Radio’s impressive ability to deliver an average $10 return on every $1
invested in Radio advertising.[3]
[1] Adweek “When Proctor & Gamble Cut $200 Million in Digital Ad Spend” March 1, 2018
[2] Wall Street Journal “P&G Posts Strongest Sales Growth in Five Years” October 12, 2018
[3] Nielsen ROI Studies 2014 – 2016
