Red Frog, Inc.

by Rene Churchill

In the simplest terms, advertising is putting a message in front of a bunch of people and hoping that some of them come to your business or website and spend their money. Hopefully the profit from what they purchase is greater than the cost of the advertising.. After all, the profit is why we're in this game.

At one of the companies I worked for, the VP of Marketing told me that "90% of your advertising dollars are wasted. You just don't know which 90%." However, this does not have to be true when you're talking about Internet advertising. Computers are great at tracking and counting things, it's what they do. With the Internet, it is possible to approximately track about how many people saw an advertisement, how many came to the website and how many made a purchase. From those numbers, you can figure out if the advertising paid for itself, lost money or hopefully made you a profit.

Note that I say "approximately track". These things being measured are interactions between computers, not Big Brother noting down your every move. For example, a "unique visitor" to a website is actually a single browser on a single computer. If it is a public computer in the town library, many people are using it, but it will only be counted as a single unique user. The other side of this coin is users like myself with multiple browsers installed on their machine. If I go to a website in both IE and Netscape, I'm counted as two separate unique users. By and large, these small differences average out in the end. Don't obsess about the exact numbers but pay attention to the general trend.

Once you can measure something, you can then improve or optimize it. The basic formula for converting advertising into direct sales profit is this:

(Impressions x Clickthru-rate x Conversion Rate x Average Sale x Profit Margin) - advertising cost = Campaign Profit

For example, a business might purchase 1 million banner ad impressions on a website. If their click-thru rate is around the current average of 0.5%, that will result in 5000 site visitors. If they do a good job of converting these visitors, perhaps 3% will make a purchase, resulting in 150 sales. If widget X goes for $200 a pop, that $30,000 in gross sales. If it's a commodity product and the profit margin is only 15%, then that's a net profit of $4500. Depending on what the banner ads cost, that may or may not be enough to turn a profit on this ad campaign. Assuming an ad price of $4 per thousand impressions, those million banner ads would have cost $4000.

(1,000,000 x 0.005 x 0.03 x $200.00 x 0.15) - $4,000 = $500 profit.

Defining each element of the formula:

Impressions - An impression in the Internet world is browser displaying the advertisement one time. This is often called the advertisements "reach", in how many people did it reach.
Clickthru rate - This is an Internet specific term that describes the percentage of people who saw your advertisement that actually came to your business or website. In direct mail, this is also called the "response rate". Basically if 100 people saw your ad, how many of that 100 actually clicked on it to arrive at your website?
Conversion rate - This is a description of your sales success rate; of the people who came to your business or website, how many actually bought something from you?
Average sale - This measurement defines the size of your average sale. Are you selling dollar discount books, or $10,000 paintings? Obviously a business with a higher average sale can support a higher advertising cost for each sale. This is why you often see ads for cars, a big expense, but few ads for inexpensive items like rubber bands or table salt for example.
Profit margin - This is a number every business owner should know by heart. Out of each sale, what percentage of that money is above and beyond what it cost to produce or create the product or service that you're selling. If a wigget costs $80 to make and I sell it for $100, my profit margin is 20%, or $20 of the sale.
Advertising cost - This is what you paid for the advertising campaign.
Campaign profit - This is the money that's left over after your advertising campaign. Hopefully it's a positive number. If it's a large positive number, why are you bothering to read this article? Write up how you did it and let me know! If it's a small number, or worse, negative, then we need to continue this article and talk about how to improve the situation.

As the business owner/operator, you have some control over each of these elements. Tweaking each one will help optimize the profits from your advertising campaign. However, some changes can cause more harm than help and sometimes some of the optimizations will conflict with each other.

Improving impressions

Doubling this number obviously doubles the profit, assuming the rest of the numbers remain the same. So advertise as far and wide as makes sense for your product. Bear in mind that the assumption that the other numbers will remain the same is not always true. You can easily get impressions in front of the wrong audience. Advertising to the wrong geographic region, or age group will kill your clickthru-rate and waste your advertising dollars. Increase the number of impressions as much as you can, but be aware that there is a limit to the audience that would be interested in your product.

Improving the clickthru rate

Again, doubling this number will double your profits, assuming that the rest of the numbers remain the same. You can increase your click-thru rate by doing one or more of several things:

Make your message relevant to the viewers current needs. Advertising Christmas lights in July is probably a waste of money as is advertising sailboat rudders in Car & Driver magazine. The great thing about the Internet is you can make some educated guesses about the mindset of the viewer. For example, if you are purchasing ads on a search engine, these are typically tied into what the user is searching for. So your ad for Christmas lights will only be displayed to those people searching for Christmas items. The boat rudder ads will only be displayed to sailing fans, etc.
Use action verbs. Tell the viewer what to do. While it seems obvious that the viewer should pick up the phone and "call now!", ads that prod the viewers towards a specific action such as "come right down", "click here", or "call now" will do much better than passive ads that merely say "We've got a great price on X".
Define your benefit to the purchaser. Never assume that the viewer will make the connection between your product's feature and the benefit's resulting from it.

These suggestions are all advertising refinement ideas and there is a ton of material that has been written about it. I'm sure that there is lots more that I'm not aware of and many thousands of times what I can include in the space of this article. However, also be aware that there is a VERY important reason to REDUCE your click-thru rate:

Several Internet advertisers have started accepting some of the risk of the advertising game. These are typically pay-per- action schemes. Pay-per-click, like Google and Overture, is the most common, meaning that you only pay a fee if the viewer clicks on your advertisement. This is a wonderful deal for the advertiser because it simplifies the first portion of the equation, i.e. simplifying (Impressions * Click-thru-rate) to just Click-Thrus.

The risk is lower for the advertiser because users must be mildly interested in the product they're selling in order to click on the ad in the first place so the quality of the visitors to your website should be higher. Since you're paying for every click, you don't want to waste that money. You want the people who have clicked on your advertisement to be actually interested in purchasing what you have to sell. Think of it as cherry-picking the good customers. To do this effectively, be as clear as possible on what it is that you have to sell. This will winnow out people who aren't interested in your specialty. For example, say "Reproduction 60's Mustang Equipment", not "Antique Auto Parts". After all, if you don't sell Cadillac parts, you don't want to pay the clicks of people looking for them.

Improving your conversion rate

This is a bit of an art and is almost completely dependent on the quality of your website. You've brought an interested prospective buyer to your website, now you need to convince him or her that your product is the one that they've got to have. Reams of material have been written on how to improve your website by improving navigation, graphics, color and font choices. However, don't forget the fundamental fact that the prospective buyer is looking for information about your product. Lots of glossy, beautiful graphics, a Flash splash screen, etc. all may please the VP of Marketing's ego, but what the buyer wants is cold hard facts. How much is it going to cost, what will it do for the money? Above all else, you MUST answer these two questions.

Any improvements that you make to your conversion rate go straight to your bottom line. Your advertising expense is up at the beginning of this equation. Any additional purchases you can wring out of the traffic that you've bought are basically free.

In general, I recommend avoiding advertising any give-aways. While it can greatly increase your click-thru rate, it will also drive your conversion rate down. There are many email newsletters dedicated to locating the current crop of cool prizes and free stuff being given away. If your aim is to collect lots of email addresses, go for it, but if you're trying to make sales, hunt for the people how need what you sell.

A good place to spend some effort is to customize the URL that your site visitors go to when the click on the ad. Set up a separate landing page for each advertisement that you're running. To continue the car theme, if you are advertising "Reproduction 60's Mustang Equipment", send the user directly to the Mustang equipment. You'll lose a majority of your site visitors if you just dump them at the home page of the website and they've got to search out the Mustang section. This way you can run separate advertisements for Mustang folks vs. MG's vs. Buick's, etc.

Improving your Average Sale

In general, the more they buy, the more profit you'll make, so encourage the buyer to open their wallet as wide as possible. You've got lots of leeway to experiment here and any or all of the classic techniques can apply. Buy two, get one free. Discounts on product X if they buy product Y as well. Optional upgrade packages. Try out different techniques and play around. Offering different option combinations and packages is a great way of "updating" your website without making any changes to your core product line.

Increase your profit margin

Again, there are many classic ways of doing this, raising prices is one, lowering your manufacturing costs is another. You don't want to lower the manufacturing costs too much or your product will get a reputation for being shoddy and your sales volume will drop. Everything is a trade-off.

Frankly, one of the best ways to improve your profit margin is to raise your prices, however doing so can slaughter your conversion rate. Still, it's still possible to make good money by doing this. For example, if you sell widget X for $100 a pop and you make $20 profit on each sale, a sales volume of 1000 units will net you $20,000 in profit. If you increase your price to $120 each, your profit on each sale will double to $40. True, your sales volume will drop. However, you only need to sell 500 units to make the same amount of profit. If the sales volume only drops to 600 units, your profit will actually increases to $24,000 with fewer sales.

Lower your Advertising Cost

This is the final element that you can modify in the equation. The less money going out as advertising fees, the more money stays in your pocket. While the old saw says that you've got to spend money to make money, you don't need to throw it away. You can also strike a harder bargain with your advertising suppliers, for example, never, ever pay the rate card price. Buy in bulk for cheaper rates. Experiment and try alternative venues that are cheaper.

By far the best way to stretch your advertising budget is to use this equation and measure the success of each advertising campaign. If the campaign isn't paying for itself, STOP! Measure and evaluate the results. Know what you're paying for and what you're getting for your money. Plow your money into the campaigns that make money and kill those campaigns that don't.

Final Caveats

Note that the entire thrust of this paper is aimed towards direct sales and marketing. There are entire classes of products that do not sell well through direct marketing so the equation will break down. Cars and other big ticket items are a good example. Most people won't go to a website, lay down their credit card and order a $25,000 vehicle. A good website will assist in making car sales by providing factual information to prospective buyers. It can become an integral part of the marketing and sales pitch, but without the direct sales link, it's very difficult to quantify it's effectiveness.

You'll also read a lot about "branding" as a reason for advertising. Simply put, branding is an attempt to link your company name with the item you sell. The end goal is to have the consumer immediately think of your product when they need it. Kleenex and Xerox are both good examples of highly branded products because their brand name has become the generic term for any such product. This kind of branding effort is generally reserved for those companies with deep pockets willing to waste their money on warm and fuzzy advertising. For the vast majority of small business advertising on the Internet, I don't believe that it's worth the effort and expense.

In the future, I'll be writing several follow-up articles on specific techniques to measure and improve various portions of this equation. By discussion each item separately, I'll have the time and space to provide more specific examples.

Back in 1988, Rene Churchill left his home state of Vermont and moved down to Mass. where he toiled for various computer companies for almost 10 years before striking out on his own, starting Vt. Web Wizard in 1998.

Vermont Web Wizard LLC
25 Crossroads
Waterbury, VT 05676
phone: 802-244-5151
fax: 802-244-5512
rene@vtwebwizard.com