I got a call recently from a friend whose company has developed a new consumer software application. He had been presented with an opportunity to buy banner ad exposures on a newspaper web site.  “The price,” he said, “seems pretty amazing.” (In a good way.)

The newspaper had offered him banner ads on their site at a price of $0.02 per exposure. So, he would pay 2 cents every time the banner was presented to a site user.  This seemed so cheap, he was suspicious. My reaction was the opposite.

This seems to be a common challenge faced by marketers – forecasting return on investment (ROI) BEFORE deploying marketing dollars. Yet I would argue that there are few if any cases in which ROI should not be the primary driver of marketing decisions.

Here is the very simple exercise that we undertook to determine that this apparent bargain from the newspaper was actually a BAD investment for his company.

His software product retails for $50.00.  With a software product (unlike tangible widgets), the cost is largely incurred by the company up front in development.  But nevertheless, when people order this particular software, they receive a package including a CD ROM that costs approximately $7.00 including shipping.

So, their gross profit on a sale is approximately $43.00 before any overhead expenses or recuperation of development costs are taken into account.

Now, lets suppose he takes the newspaper’s offer at $0.02 per exposure.  If things go AMAZINGLY well, 2% of people who see the banner will click through to his site. (In reality, this click through rate will likely be less than 1%.)

So, for every 100 exposures ($2.00 spent), he gets two click-throughs – for a cost of $1.00 per click.

Now let’s suppose that his site converts visitors into buyers at a rate of 2% (average to slightly above average for an e-commerce site). For every 100 visitors ($100.00 in banner ad exposures), he makes two sales – for a cost per sale of $50.00.

You see the problem.  Even with generous assumptions about click-through rates, his customer acquisition cost ($50.00 in this scenario) is higher than his gross margin ($43.00). Translation – $0.02 per banner exposure is a BAD deal for him in this case.

Were there a recurring revenue stream from the sale of this product (a subscription of some kind), maybe an argument could be made using a higher lifetime value for a customer, but in his case, the sale is a one-time event with no real potential for additional revenue.

The moral of this story – be sure you can realistically expect a positive ROI before you invest your marketing dollars.  The math is usually pretty simple.  The hard part for marketers is often simply gaining access to sufficient cost data to establish thresholds for acquisition costs (a topic for a future post….).

I conduct a monthly executive dialogue with members of the Retail Merchants Association in Virginia. Business owners attend a lunch session that we call Smart Marketing, and I have the chance to watch and counsel them in their responses to our ailing economy. These days, the decision making patterns of most of them is so consistent that I find it hard to contain myself.

When the economy slows down, the ad sales people crank up.

Like your stock broker who started telling you what a great time it was to buy… buy… buy on the day after the market dropped 777 points, people selling advertising of all kinds are telling marketers that this is the time market like crazy.  The rationale – this is your chance to gobble up market share while your competitors wallow in self-pity.

Don’t take the bait. While there are cases in which it actually does make sense to increase your marketing investment when times are slow, this is far from a good rule of thumb – especially in this downturn.

In general, there are four ways that marketers can react to tough times.

The first is to follow the advice of your ad sales rep, and TURN UP THE VOLUME. What your sales rep fails to mention is that this approach works only when your competitors do the opposite.  If everyone markets louder, all you’re doing is increasing your already inflated customer acquisition costs.

The second thing the rep fails to mention is that when your consumer’s emotions and priorities shift, your message has to shift as well.

Have you seen the latest TV ad for the Cadillac Escalade? You can’t ignore the changing times.  The focus of the ad wasn’t really on the vehicle’s amenities or imposing stature on the road. It was on efficiency… Haul eight passengers at 22 MPG in the city.

If you haven’t done so already, you need to check your message for its relevance TODAY. Last year, you were selling the biggest, the best, the most elegant.  Today, you need to be selling the most sensible, efficient, economical…

Think about how to re-cast what you sell BEFORE you blow more money broadcasting a message that’s out of sync with your consumer.

The second possible reaction you might consider is to silence your marketing.

I’m equally opposed to this idea unless it is absolutely necessary for short-term survival.  It’s not the trimming of marketing budgets that troubles me. Most marketing budgets are so laden with fat that there’s plenty to trim before you nick the bone if you’re careful about it.

My concern is the downstream impact on your business.  It’s my observation that companies spend more to re-build an empty pipeline or to re-establish a presence in the marketplace than they save during periods of marketing dormancy.

This leaves only two other options… marketing smarter… and marketing differently. As you might guess, these are the approaches I’m advocating, and I’ll touch on them in a future post.

Until then… check and adjust your marketing message. Focus on your most profitable and responsive customers. And if you’re cutting your marketing budget, start with the tactics that don’t produce a measurable return.

If you’re in the Richmond, VA area, I hope to see you on January 9 for the Retail Merchants Association’s First Friday Forum. This will be my topic.