I recently read an article by a gentleman (article found here) named Charles Warner. Mr. Warner has held some significant marketing positions, has written a textbook on marketing, and now teaches at The New School in New York.
The article is a long conversation on how to show a potential purchaser of advertising space (in this case a supermarket chain purchasing ads on a radio station) the return on advertising investment.
It’s a detailed article, but it confuses revenue with earnings.
To sum up the article, the advertising salesperson shows the supermarket executive that if he invests $1 million in advertising and another $500,000 to increase staff at the stores to handle the increase in store traffic, he will see an increase in revenue of $2 million. Mr. Warner states that this is a 50% return on the advertising investment ($500,000 net increase on $1 million in advertising).
What is missing is that earlier in the article, the author points out that the grocery store has a gross margin of about 3% including advertising. That means that on $2 million in sales, the grocery sees pre-tax gross profit of about $60,000.
I’ll give him the benefit of the doubt and say that the grocery chain’s marketing busget is 20% of sales. This would mean that the margin before marketing is about 23%. On $2 million of sales, the margin would be $460,000.
A profit increase of $460,000 before accounting for a marketing expense of $1 million and the increased staffing needs of $500,000 is worse than never running the campaign.
Even if the increase in sales for the campaign last four times as long as the campaign itself does, the grocery chain still loses money.