Saturday, 6 July 2013

The Right Amount of Advertising?

How much advertisement is the right amount?

Deciding how much to spend on advertising can be difficult. Too much, and you could rack up a big bill without it paying off. Too little, and you simply won't sell as much as you could.

Striking that balance comes down to three factors:

1. Tax

2. Short term ROI

3. Long term brand development

Tax is all about deductibility. If you're lucky enough to live in a tax regime whereby marketing costs can be deducted from your tax bill then you can essentially advertise at a net cost close to zero. It's not quite zero as you are paying out the cost immediately, but getting the equivalent benefit at the end of the tax year (thereby essentially giving up the money early). The major caveat with tax deductibility is that you've got to be making enough to be able to deduct from your tax. If you don't pay any tax, then you'll never get a deduction. If you pay very little, that's the cap to your 'free' marketing via tax deduction.

Short term ROI is very easy. Take the cost of the advert. Work out how many you need to sell to pay for the advert (adjusting for income tax on the royalty if applicable), and see if you sell that many ABOVE YOUR NORMAL SALES RATE. So many authors forget to adjust for the number of sales they would have had anyway. If you normally get 9/day on average then get 100 in the week you run an advert then you should deduced (9x7days) to get the number of extra downloads. 44 =/= 100 after all. It's up to the author how much of a return they need to pay out. Anything that makes a profit after adjustment is a good result IF it doesn't take up time organising. I know one author who spent £0 but nearly 90 hours blogging and was delighted they had 30 sales out of it. Value your own time at whatever rate you feel you are worth and factor that in (and if the rate of tax you would pay on income from labour is higher than royalty income because of artistic licence exemptions or similar then adjust your desired hourly rate accordingly).  For me, anything that is break even or better is a definite yes, and I'll run ads that come within a small margin of that in order to try and build longer term sales.

Long term is where it gets difficult as quantifying a benefit is nigh on impossible. It takes a long time to know if your advertising is working, and even if it is then you won't know which bit of your advertising did it. For that reason, I would caution against loss leader marketing. If it's a "I made $24 after tax back on a $25 advert" (in a no deduction regime) then you make a $1 loss. I'm personally happy to risk trivial amounts, but if it's "I ran a $480 advert and made $300" then you start to eat into your profit pretty badly (especially if you are in the 99c bargain bin. That $180 just wiped out 515 sales!). Having said that, you do need to build for the long term, and figuring out where your own cut off rate lies is something all authors have to do. Part of that is how affluent you are - and thus how easily you can absorb the potential loss. Part of it is believing in your brand enough to chuck money at it even when it is unproven. But that is a leap of faith, not a business decision. If you chuck money at something in the hopes of a long term rewards somewhere down the line that you can't quantify, predict or analyse... Well, good luck to you!

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