Why Not Highly Efficient Advertising Can Be Devastating
Imagine a company A created a new product. Now they want to start selling it in the market. So they start advertising. They pay on average 4$ in selling and advertising costs for each customer that finally buys. The 4$ is the result of 0.4$ costs for each customer visiting their website and 10% of the customers then buy the product. This results in 10×0.4$ for each buying customer, that is 4$.
That is all fine, as long as the company sells enough products at a high enough price, so that they can survive. For this to happen, they need both: first, sell their product at a price that covers the variable production costs and the additional 4$ of selling costs and second, sell enough quantity of the products to also cover the fixed costs.
Imagine now, that a second company B enters the market, who is able to generate a buyer for only 2$ in advertising costs. Company B can do that in 2 ways:
– First, by having a lower cost per click (CPC) of 0.2$ per visiting customers instead of 0.4$. If the advertising is being paid by impressions, rather than by clicks, this is perfectly possible with a higher CTR (click trough rate). And even if it is PPC (pay per click), then it is also possible, as the advertisement is better as judged by the customers. The company selling the PPC advertising (e.g. Google) may sell it at a lower price, as they reward good customer experiences.
– Second, by having a better conversion rate for prospective customers visiting their website from of 20% instead of 10%.
By having a more efficient sales process, company B is in a much better position to grow and gain market share. For the same amount of products sold, company B has lower selling costs. In addition, company B also needs to sell less products to reach break-even due to the higher profit per products sold (lower selling costs). If it comes to a standoff between the two companies, who do you think wins?
Imagine now, that company A wants or needs more buyers. How can they do that?
– First, by spending more money on advertising. If they double the amount spent, then they will get more buyers. However, the amount of buyers will likely not double in line with the expenditures, as they have to resort to more expensive and less targeted advertising methods. If the company A cannot cover its variable costs at 4$ per customer, then this is not a viable option, as it will only enlarge the loss (more sales at a loss is worse than less sales at the same loss).
– Second, company A can improve the efficiency of their advertising and sales. This might not even add additional costs and can produce the desired effect.
Of course, this article is also applicable to offline sales or online “free” and “organic” traffic (not so free, also costs time to set up and each day only has 24h).
To sum up, efficient advertising and sales can be very important for business success. If competition is tough, then it may even be a necessity for survival in the business.
What are your experiences?
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