Advertising: Benefit & Cost Ratio

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When making a decision about advertising opportunities for your business, it’s important to consider the costs involved, as well as how the advertising opportunity might help or hurt your company. An advertising opportunity could range from placing a print advertisement in a magazine that targets your audience to running an advertising spot on the radio or handing out product samples and business cards at a community event. Use benefit and cost ratio to help make advertising decisions for your company.

Purpose

  • Benefit and cost ratio is an objective way to calculate costs vs. benefits for advertising activities your business is considering as a part of its marketing tactics for a given period. It's a widely used decision-making tool based on a mathematical equation.

Who Uses It

  • Marketing managers, marketing directors, sales professionals and small business owners use the benefit and cost ratio when they are trying to decide whether they should make a change to their marketing activities.

Understanding Costs

  • Costs can range from the cost for equipment, employee training, materials and supplies; to human resources you need to complete a task, and even food and drink, if you’re hosting an event. Cost can be one-time expenses, or in the case of supplies and equipment or having a website built, you may have an ongoing fee for maintenance and updates.

Understanding Benefits

  • In benefit and cost ratio, benefits include elements, such as employee productivity, improving customer service and increasing sales volume. Just like costs, benefits are expressed in dollar amounts using present value. Benefits are usually estimates based on research and projections, but are not necessarily absolute.

Equation

  • As an example of how to use the benefit and cost ratio, consider you're marketing an anti-aging product and you want to purchase an advertising placement on a blog, host a spa event and create a brochure to market the event. The cost of the blog advertisement is $700, the spa event costs $1,500 and the brochure costs $500 to produce, therefore, you're total costs are $2,700. In this example, your benefits end up equaling $10,000. To find the benefit/cost ratio use this equation: Benefit/Cost = $10,000/$2,7000 = 3.7. So in this example, the cost benefit ratio of 3.7 means that the tactic suggested for launching the anti-aging product are reasonable to pursue.

Measurement

  • When evaluating benefit and cost ratio, note that the higher the benefit cost ratio, the better the tactic is suspected work to benefit your company by maximizing your revenue and keeping your spending at a reasonable level. The goal is to make advertising decisions based on the tactics with ratios > 1.

References

  • Photo Credit executive image by CraterValley Photo from Fotolia.com
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