How would you calculate the required return on your advertising required to break even on the cost of the advertising?
There is not a simple equation to answer this question. There are so many variables to the success of an advertising campaign. There are also factors that are difficult if not impossible to determine.
With that being said, if you have 25% food costs on a $10 order then every order the advertising generates gives back $7.50. This is making the assumption that the sale is an increase to your regular business. If you spend $1000 on the advertising, you need to see about 135 new $10 orders to cover your costs.
Here is where the water gets muddy. What is the one year value of a customer? Assuming a customer will order 2 times a month with an average order of $15. That is $30 a month or $360 a year. If you remove the food costs of 25% that is $270 a year.
If the $1000 spent on advertising gets you 4 new customers that spend $270 a year you have covered your initial investment. Each new customers beyond the first 4 now adds $270 gross profit to you year.
Thank you Daddio
As Richard said it is a very hard thing to calculate…But in the short term if you generate 3.00 to 4.00 in sales for each 1.00 spent you have done okay…And if some of those sales are from new clients who may be with you for years to come the return gets even better…
Advertising is the one expense that should not be capped if it is generating a positive return…Some folks want to pick a certain % but if you spend more and it continue generates a positive return, keep spending…That is i the best way to carry more to the bottom line…