I've talked about advertising response rates in relation to what your product or service is in a number of different articles.  In this article, we will discuss exactly what it all means for the success of your ad campaign.

 

The response rate is the ratio in the form of a percentage of how many people made a purchase with your company in relation to how many people were exposed to your ad.  If 100,000 people saw your ad and 1,000 made a purchase, your response rate would be 1%.  Depending on what ad medium you're using and what you are selling, a 1% response rate could be incredible OR terrible.

 

Companies whose average sale is low ($20-$50) need a much higher response rate compared to a company whose average sale is $1,000-$2,000.  One sale for the latter company could pay for the entire ad campaign, while the first company may need fifty or more to pay for the ad.

 

Below is an example of how response rates compare to an average sale for your company.

 

The ad medium will be a catalog mailing.

Cost to mail out 100,000 catalogs will be $70,000.

To make it simple, we'll say that all sales are 100% profit.  I know this isn't true but everything will still be relative.

 

Here's the response rate you will need to break even on this ad campaign based on average sales.

 

Avg. Sale       Response rate needed to break even

$20                3.5%

$50                1.4%

$100               0.7%

$200               0.35%

$500               0.14%

$1,000            0.07%

$5,000            0.014%

$10,000          0.007%

$25,000          0.0028%

 

As you can clearly see depending on what your average sale is it drastically affects the response rate needed to break even on this ad campaign.  The company with an average sale of $20 needs a 3.5% response rate to break even with this ad campaign.  That's 3,500 sales!  The company with an average sale of $25,000 (like a car) is making profit after only 3 sales!  Same campaign but one company needs 3,500 sales to break even while the other needs only 3 sales and they're making money.  This is why the U.S. automotive industry spends by far the most in advertising than any other industry in the world.  They only need to sell a handful of cars per print ad in a major magazine to break even, and it takes only 40 car sales to cover an entire $1 million tv commercial ad campaign.

 

When I analyze an ad campaign, I always use the logic above to decide whether or not I should go with it.  I compare my average sale amount for that business against the number of people the ad will reach at the ad price the company is asking for.  I start out with the break even point because I don't mind trying any type of advertising as long as the worst case scenario is that I break even.  If after doing all my figures I see I need a 10% response rate to break even, forget it.  It's not going to happen.  Even 3.5% is high.  If it's a catalog mailing I use a 2% response rate as my break even rate.  Pay per click I also use 2%.  You need to have an opening break even response rate or you won't know how much to spend on the production and shipping of the catalog, or how much to bid on pay per click.  Then after the campaign starts, you can track the results and make adjustments based on what the real response rate ends up being. 

 

Magazines are an entirely different ball game.  A magazine with a 60,000 readership could yield more sales than a magazine with a 600,000 readership.  Strange but it happens.  You can't say, "I got a 1% response with this 60,000 readership magazine which was 600 sales, so I'll get a 1% response with this 600,000 readership magazine and will get 6,000 sales.  I can budget and pay $60,000 for this bigger readership ad."  This logic usually doesn't work.  Forget about 6,000 sales or even 600, this bigger readership ad might bring in only 100 sales, and you'll lose $50,000 in one pop.  It happens a lot.  You never know what to expect with magazine print ads.

 

With magazines it's basically trial and error unless you can speak to someone who has advertised in that magazine.  Other than that, you're flipping a coin because the ad reps won’t be honest with you.