Calculating advertising efficiency involves dividing the advertising budget by the number of people reached and the number of people who converted to buyers. Analysts use this formula to measure the success of advertising and find ways to reduce costs while reaching the same number of people.
Calculating advertising efficiency by calculating how much money is spent per sale is how companies find out if they are making money and new sales through advertising. There are several equations for this, such as figuring out how much money it takes to reach an entire population and how many people convert to buyers. By comparing these numbers, companies can measure the success, or advertising efficiency, of their efforts. Regardless of how the business is marketed, be it radio, outdoors or online, measuring efficiency is done the same way. If efficiency is low, companies need to reduce the total amount of advertising until they are profitable or find a way to advertise for less money.
Businesses constantly advertise to convert non-buyers into buyers so they can make a bigger profit than the previous quarter and keep loyal customers. Advertising is one of the biggest costs for a business; therefore, a business will want to run the most efficient marketing campaign and spend as little money as possible to gain new sales. To measure marketing success, analysts use an advertising efficiency formula.
The first part of the formula involves the total population and advertising budget. For example, the company is trying to reach 100,000 people and is committing $10,000 dollars (US$) to the effort. By dividing the two, the analyst finds that it takes $10 to reach each person. This is used in initial planning to see if advertising costs can be reduced before running an ad.
After the ad runs, analysts use another formula to find out how effective the ad was. The ad budget is divided by the number of people who purchased the product. If the budget is $10,000 and 50 people bought the product, that means the business spent $200 for every new customer. The average sale is measured and compared to each new customer’s expenses. If the average sale is more than $200, advertising efficiency is achieved; otherwise, the company has spent a lot of money.
To increase advertising efficiency, analysts will find ways to advertise to the same amount of people but at a lower cost. This could involve running shorter commercials, finding a radio station that charges less for advertising, or offering less expensive keywords for online advertising. Advertising in more populated areas, where more potential customers will hear or see the message, can also reduce advertising costs.
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