As a marketing consultant and owner of a marketing firm, a big mistake I see businesses make is they do not take into consideration the value of repeat sales when they review if their advertising is profitable.
When determining if your advertising is profitable, you need to look at advertising as a long-term investment, just like buying stocks, real estate, or mutual funds. When evaluating your advertising you need to take into consideration repeat sales from each new customer your advertising produces. Nearly all businesses earn the majority of their sales and profits on repeat sales, NOT first time sales. Understanding this concept is one of the secrets to building a successful business.
For example, let's say you run a small quarter page ad in your local shopper coupon magazine. This small ad costs you $300. From that single ad you attract three new customers who each buy $50 worth of your merchandise. From that information you would think that you had a loss of $100 on that ad because you paid $300 for it but you only generated $150 in sales. But let's look at the long-term effect of those three new customers.
Let's say that each of those three new customers purchases an additional $250 of merchandise from you over the next 11-months. When you take that into consideration, your $300 ad has now generated $900 in sales. And, what if each of those three customers purchases an additional $300 of merchandise from you the following year? Now, your original $300 ad has generated $1,800 in sales over a 24-month period. To put that into perspective, if you bought $300 worth of mutual funds and in 2-years your $300 investment was worth $1,800, you would be jumping for joy! That is why you need to view the profitability of your advertising on a long-term scale, not on a short-term 1-2 month scale. Advertising is an investment to generate long-term customers and repeat sales. Your focus as a business owner must always be on generating faithful long-term customers, NOT one-time sales.
Let's broaden the picture even more. Let's say one of your three new customers loved your merchandise so much that she told two of her friends about you, and her two friends each becomes a long-term customer of your business. And, what if those two friends each buys a few hundred dollars worth of merchandise from you over the next couple of years? Do you now see the tremendous long-term value of that $300 ad you placed?
Now that you have a better understanding of advertising as an investment, it is vitally important that you track the source of every new customer (i.e., did they find you in the yellow pages, direct mail, radio, Internet, etc.). Whenever you talk to a new customer you must ask the customer, How did you hear about us? Then, you need to track the source of that customer in a spreadsheet or a CRM system and track how many sales that customer makes over time. This is the only way you can truly determine if an advertising strategy is working. Yes, this takes time but it is worth it. And, a good CRM software application can make this tracking very easy.
In summary, before you throw in the towel on your advertising strategies because they are not immediately generating a profit, you must first understand that value of a new customer over time. Stop looking at advertising as a short term expense and start viewing advertising as what it really is, a long-term investment to the success of your business.