Calculating advertising efficiency by calculating how much money is spent per sale is how businesses figure out if they are gaining money and new sales through their advertising. There are several equations that go into this, such as figuring out how much money it takes to reach an entire population, and then how many people are converted into buyers. By comparing these figures, businesses can measure the success, or advertising efficiency, of their efforts. Regardless of how the business is marketed, — be it radio, billboards or online — measuring efficiency is done the same way. If efficiency is poor, then businesses need to cut back on the overall 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 larger profit than the previous quarter and to keep customers loyal. Advertising is one of the largest costs for a business, so a company will want to run the most efficient marketing campaign while spending as little money as possible to get new sales. To measure marketing success, analysts use an advertising efficiency formula.
The first part of the formula involves total population and the advertising budget. For example, the business is attempting to reach 100,000 people, and is allocating $10,000 US Dollars (USD) to the effort. By dividing the two, the analyst will discover that it takes $10 USD to reach each person. This is used for the initial planning to see if advertising costs can be reduced before running an advertisement.
After the advertisement has run, analysts use another formula to figure out if advertising was efficient. The advertisement budget is divided by the amount of people who bought the product. If the budget is $10,000 USD, and 50 people purchased the product, that means the company spent $200 USD for each new customer. The average sale is measured and compared with the expenditure for each new customer. If the average sale is above $200, then advertising efficiency is achieved; if not, then the company spent too much money.
To increase advertising efficiency, analysts will find ways of advertising to the same amount of people but at a lower cost. This may involve running shorter commercials, finding a radio station that charges less for advertising, or bidding on less expensive keywords for online advertising. Advertising in more populated areas, where more potential customers will hear or see the message, also can reduce advertising costs.