Why half your ad spend is wasted
“Half the money I spend on advertising is wasted. The trouble is I don’t know which half.” That’s what John Wanamaker, a Philadelphia retailer, said in 1919. John is a marketing pioneer who is reported to have run the first ad ever.
Today, this question is still being asked. Why do many marketers still believe half your ad spend is wasted? Because, with all the different advertising choices, types, tactics, and channels, advertising is primarily set up to measure whether your target sees your ad. Not whether it delivers the intended business results. However, this can change
Here are 7 steps to solve and resolve why half your ad spend is wasted.
1. Define success at the start
Before you spend a dollar, identify the business results you expect in return. Do this simple calculation:
- Define the results expected from the advertising (e.g., sales, revenue, leads) over a specific time period even if it is just an estimate or guess.
- State the ad spend for this period.
- Calculate your ROAS (Return on Ad Spend) = Return/Spend
ROAS is a key metric, especially important to establish at the beginning. That’s because you define success. Moreover, from this point on, all ad spend is measured by its contribution to the bottom line. Here is an explanation of why Return on Ad Spend matters. In terms of norms, $2.87 for every $1 spent is the average ROAS according to one source. Another says $4 in revenue for every $1 in ad spend is a common benchmark. If you’re having any difficulty estimating your return, base it on a number that is in this range.
2. Estimate financial returns for each ad channel
Next, calculate the ROAS for each channel. This is a guide to see if your ad spend is well spent or wasted. Ask your ad agencies to do this if you are unsure or don’t feel equipped to answer. It’s just an estimate. But one that establishes mutual accountability.
Expect the ROAS to run a range by ad channels. In all likelihood, the ad channels that receive the most ad spend (like TV) have a lower ROAS than ad channels with lower spending (like digital). This balances out. That’s because the ad channels are going to work together.
3. Identify actions that show if the advertising is working
For each media channel, determine the expected action from the target. For example, when someone views a TV commercial, do you expect them to go to a store and buy, visit a website, or search online? Or, when someone sees a digital ad, are they expected to visit a website, or a particular page and buy or request information?
These actions are conversions. They are easy to set up. Some are more important than others. So, there will be micro and macro conversions. The macro conversion tracks revenue or as close as you can get. Conversions are another critical metric to understand what’s working or wasted. For a good explanation on conversions, both micro, and macro, here is an article from the person who coined the term, Avinash Kaushik.
4. Determine the cost of each action
Next, take your conversions. Divide by the the ad spend for the respective ad channel. Now, cost/conversion has been established. This metric not only helps show how ad spend is working or not, but it also gives valuable learning into the tactics that are the most effective and leads to the best results.
There are other measurements from these numbers you can use such as Conversion Rate and Cost Per Acquisition. You may decide these add value or not. Use these measurements to change the playing field from measurements that measures media to the ones that measures results and how much they cost.
5. Create an actionable scorecard
Key metrics to prove whether ad spend is working or wasted have been established. They are:
- Return on Ad Spend (overall and by channels)
- Conversions (Micro and Macro)
They are Key Performance Indicators (KPIs) to serve as an actionable scorecard to keep your strategy and ad spending on track. We believe, to measure why ad your ad spend is wasted, a number of KPIs that measure financial return should be in the scorecard. You have a blueprint to guide business and financial success. If other metrics like Conversion Rate, Click Through Rate or Clicks increase perspective, they can be added, too.
A regular review of the scorecard should be established. It can be weekly, monthly, or quarterly. The criteria for determining the review period should be based on how long it takes for your tactics to show reliable results. Plus, a willingness to take action based on the results at each review period.
6. Test and improve
Key elements that determine the success of your ad program are creative, content, messaging, spending for each ad channel, and specific tactics. As a result, you have to regularly test these areas.
Ad testing involves putting different ads in front of a sample of your target audience and asking for feedback on them. You can run ad tests on an entire ad or specific aspects of it, and collect feedback on anything from how much the ad stands out to how believable they find it.
Pre-testing, post-testing, A/B testing, multivariate testing, surveys, and polls. These are a few examples of the types of tests to be considered.
7. Be in it to win it
If you evaluate your ad spend by business results and financial measurements (which just make common sense) and set yourself up with the right measures, advertising will be an integral part of success and you will know if your ad spend is wasted or working.
A final measurement to consider is Customer Lifetime Value (CLV). This shows how long it takes to recoup the investment to acquire a new customer, and the value of a customer relationship and provides a prediction of future profitability and revenue for forecasting. So, advertising is successful now and in the future.
A simple way to calculate is to look at the total average revenue generated by a customer and the total average profit. You may want to break down your company’s CLV by quartile or some other segmentation of customers. This can give greater insight into what’s working well with high-value customers. So, you can work to replicate that success across your entire customer base.
Do these 7 steps help you to know whether your ad spend is wasted or working? And how to make it work better over time?