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Advertising – Monitor Performance

In small business it is difficult to know if your advertising is effective.  Often the methods or campaigns you use to get customers to your store or to purchase your product appear to be effective but in reality are nothing more than usual volume of activity.  Without a monitoring system you could be wasting dollars for advertising programs that could be used for more effective methods.

This article will illustrate tools you can use to monitor performance of various advertising methods.

I’m going to start out with a relatively simple advertising program I once witnessed and how the management team had no idea of its performance.

Back in the late 90’s I was an accountant at a dealership.  The general manager agreed to a 10 day multiple occurrence radio spot.  The sole goal was to bring in customers for a special sale over an extended holiday weekend.  The radio spots went off without a hitch and I happened to work on that Saturday of the holiday weekend to catch up.   At one point I decided to walk the lot and see all the activity.  It looked rather busy as there were lots of customers walking around looking at units.  Wow I thought this is exciting.

About 10 minutes in I met up with one of the salesmen and I asked him how it was going.  I commented on how busy it was.  He laughed and said ‘Not really’.  Huh?  He explained further that this was normal during this holiday weekend and not much busier than your typical Saturday.

What the hell I thought.  I cut that check for the radio ads just the other day and it was for $21,000. 

On the following Wednesday at the weekly manager’s meeting I asked the question.  ‘How do you guys know it was an effective campaign?’  Of course the general manager was a young guy and he responded with ‘Look at the number of deals we made’?  I responded ‘I counted them; they are the same as any other weekend’.  I pulled out a spreadsheet that clearly identified the number of deals from the last year on each weekend.   I included a summation schedule and a seasonal weekend average.

My question still remains ‘How do you guys know it was an effective advertising tool?’

After several of these meetings and the results were still the same the owner finally asked me what I thought.  I explained to him that it is difficult to spend that kind of money for something we have no idea of what we are getting as results.  ‘So what do you suggest?’ he asks.  I said let’s work on monitoring the various advertising methods first and then figure out which one is more effective as the method.  Then with this knowledge we can combine one or two together for a campaign and determine if they indeed bring in more customers and generate more deals than the traditional location advertising (signage, balloons, fan guy etc.).

How long will this take he asks.  I figure about 8 months total but the knowledge gained will allow you to utilize your advertising dollars more effectively and you’ll get more bang for your buck.  After all, he was spending nearly $190,000 per year in advertising.  He agreed to do this on one condition.  If overall sales decreased by more 4% then we’ll need to go back to the traditional tools to get customers back onto the lot to buy units.  I agreed.

The first step I took was to limit the method used for advertising.  Up until now, the dealership used traditional newspaper advertising, circulars in the Sunday paper, mailings, radio and a TV ad.  The TV ad was used only for one particular July 4th event each year and only the time frame was modified in the video.  The core commercial remained the same.

So with the cooperation of the general manager we decided to test the newspaper ads first.

Now I needed to design a monitoring program.

Design of the Monitoring Program

I’m not an advertising program guy but as an accountant I knew how to measure economic activity.  So I decided to use a spreadsheet for each method of advertising.  I had one spreadsheet for newspaper, another for mailings and another for radio.  I used a summation spreadsheet that received its information from the respective method spreadsheets.  In each spreadsheet, I labeled each tab with the respective weekend for reporting purposes.  I wanted to know the total number of customers that visit, actual number of encounters with sales reps, actual test drives and finally how many customers started a deal and how many completed the deal. 

The difference between starting a deal and completing a deal was usually the ability to get the financing for the unit.

In addition to this data, I wanted to compare the total volume of sales activity against the normal volume of activity.  So I created my standards of normal volume by using the previous 52 weeks of information and created what I refer to as the standard performance outcome.

So our first method of advertising was using newspaper only.  By coordinating with the general manager we limited all advertising related to that weekend’s campaign to strictly newspaper.  Of course he was really concerned about the volume of activity and he wanted to spend even more money in newspaper ads to ensure a good turnout.  I nixed that idea because it would greatly distort the results.  So in testing, be sure to only change one variable, in this case the method was limited to newspaper and the volume of ads in that paper remained normal.

It was a complete disaster.  Why?  Weather; it was a dreary rainy day that Saturday and very few customers walked in the door.  I was really nervous because I had convinced the owner that this would work.  Furthermore, I had spent time training the floor staff on how to count the customers and so on and now they were wondering what the heck, this isn’t working. 

I had to prepare for the bashing I would receive on Wednesday at the weekly manager’s meeting.  Well, to alleviate concerns I went back throughout the prior 52 weeks and pulled the weather reports and recorded the information to my spreadsheets.  For those weekends during this season of the year with rain the average number of units sold were right in line with the performance the dealership had over the test weekend.

The owner looked at me as if I were nuts; but he understood what I was doing then.  So he made me research the prior two years in order to get a much better average of performance and I had to indicate weather in my spreadsheet.  This way I eliminated a variable that affected the final outcome.  We now had a standard of performance related to wet weekends against really beautiful weather weekends.

Now onto weekend number two.  Well the following weekend was a radio weekend and this one got a little more complicated.  The general manager and I agreed to disagree over which venue on the radio dial to use.  I was inclined more towards the classic rock station as this was the age group of customers I believed purchased the units.  He on the other hand was adamant that the pop rock station was the target market.  I yielded to him on the condition that the next radio test weekend would be classic rock.  He agreed.

OK, customers came out and it was a beautiful Saturday.  Lots of deals were made and I was happy because I had a lot of great data to work with.  Or so I thought.

New issue pops up in identifying the deals closed.  For this to work a deal must close.  The owner used Tuesday at closing time as the cut-off for a weekend deal.  If the financing couldn’t be arranged by Tuesday night, the deal shifted to one of the days during the week.  The manager didn’t like this because his bonus was tied to reaching a certain tier for a weekend.  I wanted to hit him over the head with a calculator (weapon of choice for us accountants).  After much arguing he finally yielded to maintaining the standard and not introducing a new variable.

Now I’m ready, here are the results against the average:

.             Radio Weekend    Historical Average  Sunshine Weekend
Revenue          $274,740            $231,618                  $283,905
Units Sold          7                         5.7                            8.3
Total Visits        94                    Unknown                 Unknown
Encounters        61                    Unknown                  Unknown
Test Drives        38                    Unknown                  Unknown
Deal Starts         11                        9.2                           12.4

Now I’ve got something to work with.  It is obvious that a regular sunshine weekend has more units sold but most likely this is due to several advertising methods used to bring in customers whereas we restricted the method to radio only.  It appears radio works but we still don’t have enough information to have a high level of confidence in these numbers.

Notice the funnel effect related to the customers.  We counted the actual number of potential customers.  The girl assigned to the task knew that any combination of family counted as one customer.  She had to make some judgement calls but she used her experience to achieve the final result.  She came up with 94 customers visited the dealership on that day.

The encounters came from the reports of the sales reps.  This was something new for the dealership as nobody had historically recorded the number of encounters the sales reps performed on any given day.  The fascinating part about this is that the owner decided to have this report generated every day from every representative.  He wanted to evaluate the ability of a sales rep to get the customer to do the test drive.  So in effect a positive benefit came out this whole process that has nothing to do with the advertising issue.  We now had a performance evaluation tool on the sales reps.

From the test drive we could see how many deals actually got started and finally a unit sold.  I had this information available in the old files because the dealership kept the forms.

Newspaper Advertising Method

Over the course of six months we had a total of 9 more weekends restricted to newspaper advertising only.  Two of those weekends had rain or thunderstorms on that Saturday.  The other seven were fair weather with the exception of one where it was extremely hot.  Here are the average weekend results for all 10 newspaper weekends combined (remember we ran a newspaper weekend as our first test):

                   Newspaper     Historical Average
Revenue          $304,301          $231,618
Units Sold          8.4                     5.7
Average Visits   103                  Unknown
Encounters          78                  Unknown
Test Drives          46                  Unknown
Deal Starts          14.8                   9.2
                         

Hmmm….; newspaper is looking pretty good if you ask me.

Targeted Mailings

The targeted mailings worked a little differently.  In this advertising method the dealership selected certain zip codes where the medium income met the target level needed for appropriate financing of the units.  Each household in the zip code received a letter from the dealership inviting them to the dealership for a special opportunity to purchase a unit.  But there was a problem in the very first weekend.  You see a part of the mailing had a $1,200 gift certificate that could be used if a deal was generated.  The customer presents the certificate and it could be applied to the deal.

Well, here are the results of the first weekend with a targeted market:

                      Mailings          Historical Average
Revenue          $293,447              $231,618
Units Sold            10                        5.7
Total Visits          92                     Unknown
Encounters           69                     Unknown
Test Drives           51                     Unknown
Deal Starts           19                          9.2          

I was blown away by the number of deal starts.  Wow I thought.  This is great!  Many of those deal starts closed after Tuesday of the week due to haggling associated with the gift certificate. 

One of the reps came to me during the week frustrated that a deal didn’t close and he verbally told me that he even provided the gift certificate to the customer.

WHAT?

It turns out that the sales reps had each taken a handful of gift certificates and if a customer was encountered they would hand them a gift certificate if they didn’t have one.  I was livid, this means that the data is worthless because I can’t tell if the mailing worked or not.  The sales reps destroyed the data by inflating the number of test drives and deal starts.  Basically I can’t tell if the onsite advertising with the sales rep certificates did the job or if the mailings did the job.  I needed to know if the advertising method was generating this volume and not due to the representatives changing the variables.  Remember from above, you only want to have one variable that is different in order to evaluate the success of the method.

The owner agreed to have a meeting with the sales reps in order to discuss why we are doing this and explain that the idea is to identify those advertising methods that are most effective for the dealership.  They needed to restrict their actions in order to get the best set of data points to evaluate the different methods.  I needed their help.  But one of the reps stated it well, ‘This affects my commissions directly.  My job is to sell units and if there is a coupon handy I want to use it’.  It was obvious to me that their short sighted vision conflicted with my long term goal. I had to figure a way around this.  They couldn’t see that I was doing this to help them next year in getting the right kind of customer into the store.

To solve this, I decided to use a serial numbering system for the certificates.  The certificates were treated like actual dollar bills and batches of serial numbers were used for the mailings.  Any unused certificates came back to the accounting office and were locked up.  If a deal start had a certificate attached, that certificate had to have a serial number matching the pool of serial numbers we mailed out or the sales rep lost his commission on the deal.  Basically, they just couldn’t go out and copy certificates and hand them out.

We ran seven more targeted mailings over a course of eight months and here are the results:

                 Average Mailings      Historical Average
Revenue          $308,197                       $231,618
Units Sold            9.7                                   5.7
Average Visits    86                                 Unknown
Encounters         57                                 Unknown
Test Drives         47                                 Unknown
Deal Starts         16.3                                   9.2   

What intrigued me the most were the number of deal starts.  This is rather unusual since I was very careful to make sure that we controlled the certificates.  No matter what, it was very effective in getting customers to at least discuss the situation further with a sales rep after the test drive.

Final Results

The following schedule identifies the four methods used and their respective results averaged over the total number of attempts:

                     Mailings          Newspaper       Radio
Revenue          $308,197           $304,301       $281,102
Units Sold          9.7                      8.4               8.2
Average Visits    86                     103               117
Encounters          57                      78                 71
Test Drives         47                       46                 44
Deal Starts         16.3                    14.8               13.5
# of Attempts      7                        10                   4
Total Costs      $19,740           $17,618           $42,706

I didn’t include the TV Ad because the owner did it one time and it is very expensive.  It was for the biggest holiday of the year and the local fair was going on about one block down the road.  So lots of folks showed up and it was indeed a good weekend.  Personally, I think it is the owner’s one chance of getting his family on TV.  So I don’t include the results with my analysis.

With the above information it is time to evaluate the outcomes.  We had several meetings with management and even sales reps to get input as to the results and the following is the objective and subjective feedback related to each:

Radio

This is a very expensive method of getting customers onto the lot.  Notice the high number of visitors per average weekend?  One of the sales rep calls it excitement hype.  Customers show up on the lot because the radio advertisements are designed to get people thinking about having fun.  But they don’t come to buy, they are there to have fun thus the low average test drives and actual deal starts.

My inclination is the overall value.  That price for four weekends is very expensive in comparison to the other methods.  My question is why are the other methods so much more effective?

Newspaper

This particular method had the most samples of its value because the overall price is so low and the average per weekend is the least expensive for the dealership.  It brings in a high visitation rate, a much higher than average encounter rate and a good number of test drives.  In my opinion, this method is by far the most cost effective tool.  Once you read about the mailings, you’ll understand why.

Targeted Mailings

It would appear the mailings are by far the most effective tool in completing deals.  Honestly I was very impressed.  But if you look at the total revenues generated you would wonder why is it so much lower than the newspaper with a higher number of units sold.  Let’s do some accounting arithmetic.  In accounting, the revenue associated with the sales of high ticket dollar items is always net of any adjustments or discounts. 

In this case, the discounts relate to those gift certificates.  Notice that on average the dealership closed 9.7 deals and the revenue is net of 9.7 gift certificates.  Remember, each gift certificate is $1,200.  So the average discount per weekend is 9.7 times $1,200 or $11,640.   So to compare the revenue for this method with the revenue for newspaper ads, the average unadjusted revenue is $319,837 for 9.7 units or $32,973 per deal.

In the newspaper format, the average deal is $36,226.  That’s a whopping $3,253 per deal difference.  How can this be I asked everyone; because I honestly couldn’t figure it out.  The number one sales rep knew right away what the problem was.

He said that over the years he learned that when a customer came in with a coupon, they were purposely there to get the best deal possible.  It wasn’t about getting the unit they desired, it was about getting a great deal.  The newspaper ads promoted getting what you desired because it illustrated the inventory available.  The ads were not about deals, but about selection.  The targeted mailings were about deals.

I fell out my chair.  He hit the nail on the head.  He made one more interesting statement.  He didn’t like ‘Deal’ based customers because his commission was significantly less for that type of customer.  Not an issue to close the deal, just a lower than desired commission earned.  The selection customer was much better but more difficult to get them to commit.  This made sense because the newspaper number of deal starts averaged about 1.5 less per weekend over the ‘Deal’ driven customers.

Some interesting lessons learned with this analysis.

Lessons Learned

The dealership took a lot away from this exercise.  The following were the policy changes enacted and the lessons learned:

  1. The dealership continued to monitor the respective advertising methods. It significantly reduced the radio advertising and also renegotiated the radio rates.  They were able to cut the rates in half by illustrating the results using the spreadsheets I designed.  In addition, the general manager demanded and received a higher ratio of spots in the prime time slots and more overall spots for an aggregated reduced cost.
  2. The management team moved the advertising discussion up in the weekly meetings and all agreed the discussion was instrumental in increasing the dealership’s overall profit. Overall revenue only went up marginally, but the overall profit increased significantly because the dealership shifted their focus to selection and away from price.
  3. This performance concept was also implemented with the Finance and Insurance Department to increase the number of deals closed as a percentage of deals started. Over a couple of years there was enough evidence with the financing to change the terms with the banking institutions used thereby increasing the ratio of deals closed against deals started.
  4. The concept of the ‘Deal’ based customer oriented the dealership to shift to this type of customer when it was time to sell off certain lines of units or reduce inventory. So the number of mailings program was restricted to the purpose it served.
  5. Because selection was so much more lucrative, the dealership explored expanding the geographical territory it advertised to by placing ads in neighboring communities. Surprisingly, customers were willing to travel up to 2 hours to find the particular unit they desired.

In summation, if you have an expensive advertising program it is time to monitor its effective value.  Remember to isolate the variable for monitoring and use spreadsheets to accumulate data.  Teach the staff about the goal and how to monitor the various data points.  With information comes results and by brainstorming the company can evaluate the overall effectiveness of the various advertising methods.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you. If interested in my services as an accountant/consultant; click on My Services in the footer of this article.

 

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About David J Hoare (387 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns