It’s easy to get discouraged by rates like 1% or .8% but here’s a way to find out for sure…
Sometimes a low response rate can be misleading. In some industries, a response rate for your marketing is low if its 50%, in others a response rate of 2% is extremely high.
Take a look at this article about typical direct mail response rates and see how a good response rate varies from industry to industry. It’s worth finding out your industry’s average response rate.
But even that’s not the best way. Here’s a great way to calculate if your advertising is worth it or needs to change…
1) Measure you advertising cost per dollar per sale
I have to keep emphasizing this. The term was made by marketing master Claude Hopkins. You do this by dividing your total spending on advertising by the total sales your ads bring in. For example, if you spend $1000 to mail out 2000 ads, get 80 responses (4% response rate) and from there 50 sales, your cost per dollar per sale is $1000/50= $20.
It costs you $20 in adversting for you to increase your sale by one person. Now with that in mind…
2) Measure you marginal “return” per sale
How much do you make on each sale? Calculate how much you make on each sale and subtract all your non-advertising costs of that sale. It’s probably different for each type of product you sell so find out how your marginal return for each produce/service you offer.
For example, if you make $70 dollars for one product and spend $20 on non ad-costs to bring that one product for sale, your marginal return is $50 for each product you sell. Now..
3) Subtract your ad cost per dollar per sale from your marginal “return” per sale to get your marginal profit per sale
Pretty self explanatory. So from the two examples above your marginal profit per sale is $50 – $20 = $30. This means your response rates are good. If your marginal profit is negative, then you got a problem and your response rates are not cutting it (or that you need to look at your other costs and try some cost cutting)
But isn’t this just a profitability measure?
Yes! profitbility at the margin, or in other words, for every 1 sale you make.
Overall profit is too messy to understand your advertising costs in detail. It doesn’t account for cost per dollar per sale because you get a “spaghetti approach” to all your ad costs. The real values are in the margin, and they show the best way to increase your business: more sales, increase response rates, cut costs, etc. The numbers at the margin makes things much clearer on which way to go.
Your marginal profit per sale will tell you whether or not your advertising response rates are doing their job. From there you can decide how to expand.