## Advertising is only expensive if it doesn’t work

### Most entrepreneurs do not know the correct formula to calculate the cost of advertising.

Marketing Math. That’s what I call it! For some reason, most entrepreneurs cannot calculate the cost of advertising — or to put it another way — they cannot calculate their advertising ROI. This article can help you with the marketing math.

Traditional advertising is not cheap, unless it works the way it should. But I have found that most entrepreneurs cannot grasp the mathematics required to measure advertising ROI (return on investment). Here is an example. A manufacturer of coffee mugs makes an advertising buy to stimulate sales (which should be the goal for every advertising purchase). The advertising buy was for an even one-thousand dollars. The entrepreneur sells each coffee mug for \$10, and has a gross profit margin from each mug of \$5.

Most believe when the entrepreneur sells 100 mugs, that the advertising buy was worth it—that it had a positive ROI. The thinking is that if the entrepreneur sold 100 mugs at \$10 each, that it paid for the advertising buy (100 X \$10 = \$1,000). This is the math that most entrepreneurs will perform, and the advertising salesperson will encourage you to complete the math with these figures. However, this is not marketing math.

Marketing math requires the entrepreneur to do a few more calculations to measure advertising ROI. There are three things that you must do:

Here is how it’s done:

To calculate the BEP (break even point) on your advertising, you must divide the advertising buy by your gross profit margin. In our coffee cup example, the gross profit margin is \$5 per cup; therefore, \$1000 ÷ \$5 = 200. The entrepreneur must sell two-hundred additional coffee cups just to pay for this advertising buy. This is where step 2 and step 3 come into the calculation.