Part I – Network Advertising
This is what I like to call “fishing net” or “wide-reach” advertising. It’s a vast ocean out there, and while many are casting lines with bait, network TV advertising casts a comparably larger, but disproportionately expensive, net. Here are the numbers:
With network TV advertising (if you spend the time to pick your shows right & don’t let the rep pick them for you), you can come out with a strong 1.2¢ – 2¢ per impression campaign. It’s my experience that unless your goods or services has a strong reason to be attached to a certain show (and some do), bidding on time slots that have most of your target demographic & also a large amount of inventory will be your lowest costs per impression. What’s do I mean by “cost per impression”? This is the cost of an advertising campaign divided by the number of people ‘reached’, or advertised to.
For most network stations, if you run a weekend campaign on your target customers’ favorite shows (ie. morning news, Regis & Kelly, etc.) that ‘reaches’ 500,000, you’re comfortably looking at about $7,500 for the campaign. Paying somewhere around this rate (for example), and not negotiating for dirt bottom prices, will ensure that your ads aren’t dramatically preemptedWhen a TV, radio, or other media spot is bumped during a given show or program and replaced by a higher paying advertiser. Scarcity of media 'inventory' (ie. available advertising space/time) often leads to media buyers overbooking time spots.. That being said, negotiating a cheaper cost/impression with the chance to be cut regularly from scheduled commercial runs isn’t necessarily a bad strategy–especially for a steady, ongoing campaign. Preemption is an issue, however, for businesses loading up commercial air time up for a ‘limited time offer’, time sensitive promotion, or even holiday sale after haggling for dirt bottom rates.
Value of an Impression
Advertising simply comes down to:
- Cost per impression, and then
- The value of that impression.
From experience I can tell you, by comparison,
Valuation is the key here—-would I expect then to pay more per impression for a full-page newspaper ad than I would a :15 second radio spot? I would think so. But Why? How about pay twice as much per impression for an ad in a community magazine versus newspaper? Yes? Why then? Perhaps magazines tend to hang around a home longer, tend to get read all the way through, and to a degree promote more community support from businesses listed within them? But is a reader actually twice as likely to make a purchase seeing an ad in a community magazine versus newspaper? Hard to tell. Even worse—-it’s hard to measure.
Let’s look at an example:
I’ve got a good deal on 15 :30 second runs on my local network station to promote the holiday weekend sale at my furniture store. I’m getting a “reach” of about 550,000 impressions with this campaign at an estimated average frequencyThe number of times an advertisement reaches, on average, a target audience member. Optimizing an ad campaign means also looking at the amount of exposure each prospective consumer receives. Too few exposures means loss of consumer retention--too many means waste of money. The term 'effective frequency' may also refer to the number of times, on average, a consumer must be exposed to an advertisement before an action or conversion is made. of 3 (this is ideal). I’m to pay $7k for this weekend campaign:
(550,000 impressions) / (Avg. frequency of 3) = 183,333 unique viewers seeing this commercial
Now let’s make the first of a few assumptions by saying 3% of the population is in the market for furniture at any given time. This means that:
(3%)*(183,333) = 5,500 people (in this case, unique viewers of my commercial) are actually in the market for furniture at the moment.
Next assumption (and most important we’ll soon see): The percentage of people that will actually enter the furniture store after seeing the commercial. This we’ll refer to as “thru-traffic” and will estimate at 5%.
(5,500 viewers in market)*(5% thru-traffic) = 275 unique visitors in-store as a result of the commercial.
Let’s be clear though–5% is extremely generous. Any seller of advertising in the industry will tell you that 275 leads generated off of $7k spend on TV is an astronomically high expectation–but let’s see where this takes us…
Next assumption: A solid furniture store will close ~10% of traffic:
(275 unique visiors)*(10% closing rate) = 27.5 sales
Average ticket at a medium-end furniture store may be $1,500 at .29¢ margin on the dollar after COGS & delivery/handling/processing/merchant costs.
(Sales)*(Average ticket)*(Profit Margin) = Variable Profit Dollars
(27.5 sales)*($1,500)*(29%) = $11,962
Net cost of advertising:
$11,962 – $7,000 =
$4,962 Gross Profit Dollars
Sounds good, right?
But what happens when the thru-taffic is 2.5% instead of 5%?
[(550,000 Impressions) / (Avg. frequency of 3)]*(3% In Market)*(2.5% Thru-traffic)*(10% Closing Rate)*($1,500 Average Sale)*(29% Profit Margin) = $5,981
Net cost after advertising:
$5,981 – $7,000 =
A good questions. When is it worth it to take a net loss on advertising? Why’s it worth it? Actually–residual customers & TOMA (Top Of Mind Awareness) come to mind a couple good reasons. I was first introduced to the expression “Top of Mind Awareness” when speaking with a ‘high-up’ at Ashley Furniture Co., one of the most successful multi-billion dollar furniture manufacturer and retailers. They make a mint selling medium-end furniture at high margin, even still despite much competition with cheaper internet vendors.
I remember thinking that Ashley Furniture doesn’t need to commit the same advertising dollars because they’re already the first company that comes to mind. The cost of getting in that uniquie “Top of mind” position, however, wasn’t cheap. And, if the previous TV advertising example is at all an indication of how Ashley grew as a company, I would guess they’ve spent many years taking small hits at wide-reach advertising before there was a measurable & positive return.
When It Can Work Best
Network advertising works best with volume due to multiple locations. Because network reach will often cover many counties ranging 100’s of miles apart, network advertising makes sense when an advertiser has retail locations spread across those multiple counties.
For a single location advertiser, spending money to reach prospective customers outside of ‘reasonable drive time’ can be a waste. In the right circumstance, consumers will make the drive for just about any good; as anecdotally as I’ve seen this to be true, the fact remains that the value of an impression still diminishes with respect to distance (or availability). In contrast with Network advertising, Cable advertising (Part II) provides singe-location vendors more control over the geographical scope of TV advertising.
Why It Doesn’t Work Mostly
Before I continue, this is a problem for most all forms of media advertising outside of SEM (Search Engine Marketing). It’s that an advertiser overpays when 1) People are involved and, therefore, need to get paid, and 2) Advertisers outside a given market are bidding for the same, scarce advertising space.
1) People are expensive.
Americans in particular. Want to run an ad in your local newspaper? Your rep need to get paid first–he/she’s on commission. Their “creative” needs to get paid second–artists aren’t cheap, you know? Then two or three ‘middle management’ people in-between (the ones that actually get your ad from concept to printed paper), and then ‘The Man’ upstairs needs his cut.
Automated systems are always going to be less expensive that those requiring personnel. Cost of advertising doesn’t come down exclusively to consumer-end “willingness to pay”, but also supplier-end “willingness to provide services”. For how much less is an architect willing to sell a blue-print after the sunk cost of creating that blueprint has past? For how much less would an ad-serving search engine be willing to provide ads once the costs of implementing an automated ad serving platform (like Google’s Adwords or Bing’s Adcenter) has already been incurred?
Answer: “as little as to allow advertisers to bid on (scarce) ad placement”–which brings us to #2.
2) Advertisers outside your market are bidding for the same, scarce advertising space.
How can the Amway Arena, home of the Orlando Magic, charge $120,000/season for advertising spots during home games? Because there exists only so much ad ‘inventory’ per game & per season. Coca-Cola, with their nearly infinite advertising budget & affinity for sports, is nearly always willing to take up the vacant spots if passed up.
The problem here is an overabundance on the demand side of advertising. Notice that most TV ads are taken up by car dealers & that most billboards are taken up by lawyers? High margin & high-ticket item vendors and service provider gain the most from advertising. How many cars does your local Honda dealer have to sell to pay back $7k spent in advertising? By contrast, how many cupcakes does your local bakery have to sell? See the difference?
Since a car dealership would never bid for the keyword “bakery” (low relevacy = high cost per conversion), all bids for that specific keyword are only made at a dollar amount that would provide the appropriate amount of conversions per click less cost per conversion. Put more simply, only bakeries are bidding for the keyword “bakery”. No outside-the-market advertiser is artificially driving up the price of that keyword on Google, Yahoo! or Bing.
If, by contrast, only bakeries were allowed advertise on your local TV networks, not only would less advertisers be bidding for otherwise scarce ad inventory, but in general the advertisers’ (bakeries’) willingness to pay per impression would be lower.
But what advertising model actually works like this?
Let’s say now, in lieu of TV advertising, you spent that same $7,000 in advertising on Google Adwords and Yahoo! + Bing’s Adcenter. You’d be bidding on keywords like “leather sofas in [insert city]” and on keywords like “[insert city] bedroom furniture stores”.
These people are laser targeted and are actively looking for local furniture stores. The question is: How many of them can you put your name in front of?
A keywords phrase like “furniture stores in Orlando” hangs around $1.30/click. At that rate, how many clicks can $7,000 buy you?
($7,000 in advertising) / ($1.30 per click) =
I’m able to tell you (in this case, from experience & tedious record keeping) that this furniture store converts (ie. “sells furniture to”) an average of 0.68% of all ad-driven website traffic at an average sales ticket of $2,250.
(5,384 site visitors)*(0.68% converted)*($2,250 average sale) =
$82,375.20 Revenue from Sales
Furniture stores will typically net 29¢ on the dollar.
($82,375.20)(29% margin) = $23,888.81 Profit Dollars
Less $7,000 Cost of Advertising:
$16,888.81 Gross Profit Dollars.
It’s a “give me $1 and I’ll give you $3.41 back” sort of deal, isn’t it? Read more on Pay-Per-Click Advertising.