Is Advertising Worth it? How To Calculate the ROI of Advertising.

The majority of businesspeople, when asked this general question, will respond, yes, advertising is worth it. 

But, more specifically...

• Are Google Ads worth it?
• Are Facebook Ads worth it?
• Is Nextdoor advertising worth it?
• Is traditional advertising worth it?

The answer to each of these questions is more nuanced than just, yes. 

So, yes, advertising is worth it if it contributes to positive cash flow for your business. In other words, advertising needs to generate more cash than it consumes. And in this post, we'll uncover how to determine that answer. 

Why Is This Important?

Because it allows to focus your ad spend on tactics that are working, and stop investing in advertising that is losing you money.

Each platform has its unique features and benefits. Some platforms are better suited to certain business types than others. 

And for many small and medium-sized businesses (SMBs), advertising is a knee-jerk reaction, not something well planned out, and much of it is wasteful and ineffective for a number of different reasons. 

But here's how to answer that question for your business. 

How Do We Define "Worth It?"

First, I define a successful ad campaign as one that generates more cash for a business than it consumes.

If you run an ad in the paper that costs $500 but only 1 new person called you, and they only spent $200 on your products or services, that's ineffective advertising that consumed more cash than it generated for your business -- that serves nobody well (other than the advertising company you paid)!

In accounting, cash is king. And it should be for your business, too.

Cash is the lifeblood of any business, and running advertising campaigns that are cash flow drains will put you in the poor house!

Some might argue that even if it wasn't successful financially, you still created brand awareness, and you can't really measure the value of that too well.

There are times when you do want to create awareness and that's the main goal, but the majority of SMBs need the phone to ring, they need cash register to ring and cash to flow now, not brand awareness. 

The goal of Advertising is to Support Sales

Advertising should contribute positively to the financial results of a business.

It's important to hold your advertising accountable and make it pay for itself. You wouldn't keep an employee around that wasn't contributing, so don't keep advertising around that isn't contributing either.

So, to answer the question, is advertising worth it, we start the accountability process by building a simple profit blueprint to help us better understand how advertising affects our business.

The goal of this post is to provide a simple Profit Strategy Blueprint which you can use to measure the financial success of any ad campaign and decide for yourself if the advertising you're doing is worth it. You can build this model using Excel or Google Sheets.

Although the majority of my work these days is in Internet marketing, the examples I present below are with a Google Ads campaign, and then two direct mail campaigns.

However, you can use this model for any advertising you do to understand whether it's positively contributing to the financial success of your business.

Whether that is Internet advertising through Google Ads, or Yelp advertising, or any advertising where your goal is to drive sales. (Read our related post on the benefits of digital marketing vs traditional marketing and SEO for Traditional Marketing Agencies)

Build a Profit Strategy Blueprint

First, to build a profit strategy and to answer the question if advertising is worth it for your business, you need to be able to track the leads and/or sales from your campaigns. You can do this in various ways: through unique call tracking numbers, Google Analytics, overall sales measured at the P&L level, coupon redeeming, and more.

Digital Marketing Example - Google Ads:

Let's look at a Google Ads campaign for Spa that sells massage therapy. The goal of this campaign is to book new prospects for a 1-hour massage. 

The actual business type is not necessarily important, what is important is the process of measuring the effectiveness and the ability of the campaign to generate cash flow for the business.

For illustrative purposes, let's say you have allocated $1,500 per month in Google Ads spend. (read our post on, how much should you spend on Google Ads?). 

Through our unique call tracking number (unique call tracking numbers on the website, plus click-to-call metrics from the Google Ads campaign), we know how many people called the business or converted directly on the website.

So, let's see how this breaks down.

We have total ad spend in Google, we know the cost-per-lead (CPL), we know how many booked their appointments, and finally we know our average order per customer. 

In the table above, we assumed 10% of leads didn't show for the intro offer for a massage. So that leaves 135 that did. Let's look at that advertising math. 

A $1,500 investment in Google Ads produced $9,449 in sales of prospects receiving a 1-hour massage. 

But that's not all of it. Let's keep going. 

We need to focus on the net cash from fulfilling the sales and take into account the labor costs to produce those sales. 

For a licensed massage therapist, we assume that 50% of sales is labor for simplicity's sake. 

And then, we need to make marketing pay for itself, so we add in the $1,500 expense from Google.

Now we get this...

We've paid our employees, paid our advertising bill to Google, and we're left with over $3,000 in cash flow from this campaign. Not bad. So in this case, yes, advertising is worth it. 

And these campaign results are realistic and spot on. We have run these types of cash-flow profitable campaigns with Google Ads for years.  

Key Takeaways:

• Google Ads and SEO campaigns in Google typically produce the lowest cost per lead out of any advertising you will ever do
• The data is very transparent in Google. Clicks, impressions, and, most importantly, we have clear data on conversions and sales. 
• Your marketing budget will go further than with anything in traditional marketing

Traditional Marketing Example - Direct Mail Postcard:

So, let's compare a postcard campaign where each postcard costs $0.35 each and a more expensive direct mail piece that costs $1 each. The goal again is to answer the question, is advertising worth it?

Here's the total campaign cost: 

So, you can see the postcards is much less expensive, but the hope is that the more expensive direct mail pieces will produce better results.

Postcards are relatively inexpensive at a per-unit cost. The question you should ask is, will either produce positive cash to the business?

And will the more expensive direct mail piece garner that much more of a response to make the extra cost worthwhile?

For example, the more expensive direct mail piece could be variable data direct marketing letters printed on more expensive paper. 

In the direct response marketing world, personal letters from variable data generally have better response rates.

Stay with me here. Let's continue the analysis.

A response rate between 1% - 3% is reasonable, but this will obviously vary depending on the components of the piece, i.e. your offer, the CTA (call to action), a sense of urgency, effective headlines, your mail list, etc.

In our example, the Expensive Direct Mail Piece has produced twice as many leads or phone calls versus the postcard.

So next, let's calculate the sales of each advertising campaign.

If our average order size is $50 then we've achieved double the sales with the more expensive direct mail piece.

The question is, is adverting worth it? 

Let's drill down further and calculate our net sales, where we make the campaign pay for itself.

So, we can see right away in this particular case the net sales of the postcard were better, $750 versus $0.

But...

• Was it still worth it to run the postcard campaign with net sales of $750? 
• How did this affect the financials of our business?

To answer that question, we need to consider what it cost to produce those sales as we did above with the Google Ads campaign.

Let's assume labor is 50% of sales.

So back to our example, the numbers look are now negative cash flow.

In the postcard example, our total revenue was $2,500 and if COGS was 50% our gross profit would be $1,250.

So, our net sales are $750 after we paid for the campaign, but then subtracting the cost of sales (in the postcard example, 50%*$2,500) we are actually negative $500 ($750 - $1,250).

It's even worse with the Expensive Direct Mail Piece, which has put us in the hole a negative $2,500!

These data are important. 

If you stopped the analysis at the fourth chart which was calculating just your net sales you would have incorrectly concluded yes, the postcard campaign is worth it?

You may have assumed, the campaign paid for itself and generated positive cash flow, but the cost of sales expense makes this not such an attractive campaign.

Build a model like this for yourself.

Play around with the numbers to understand what milestones you must hit to make an advertising campaign successful.

So, is advertising worth it? 

In our example, yes, for the Google Ads campaign, and but not for the direct mail postcard advertising. We want advertising that produces positive cash flow.

The key is to understand which advertising campaigns are positively adding to the financial success of your company and making the campaigns accountable.

Questions? Have you tried this or something similar before?

If you want professional marketing help to grow sales and profit for your business, contact us now. We'd love to hear from you! 

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