Advertising Costs

Sean and I have a lot to learn about the business end of running a small business. We recently put together a business plan for an upcoming venture. It was quite the learning process to do so, and one of the things we learned was how to calculate a return on investment for online advertising. Being that I just bought my first paid advertisement for Brevity, I thought I would share the formula we've been using to calculate ROI. Like I said, we're pretty new at this, so if you spot any errors in my calculations, let me know!



Most bloggers have an advertising package that includes their readership and site statistics. Assuming that you're paying a flat monthly rate for an ad, and not a fee based on the number of times your ad is clicked through, one of the most important numbers is monthly pageviews or impressions. This is the number of times each month that your ad will appear on the website.

Based on a March 2009 article by E-Marketer we can assume that the click-thru rate from all of those pageviews will be 0.19%. This will help you calculate the number of click-throughs from the blog to your site. If you divide the cost of the ad with the number of click-throughs you have your cost per click. This is a useful number to help compare the cost of advertising on one blog with another. As you can see, the cheapest ad (#4) is actually the most expensive when you look at the cost per click.

We need to make another assumption - that only .5% of the people who actually click through to your site are actually going to buy anything (sad, eh?). This is your conversion rate. Assuming that you have a well targeted ad, you will hopefully have a higher conversion rate in reality. Multiplying your .5% conversion rate with the number of people clicking through to your website gives you your projected number of sales. If you multiply the projected sales number with your average sale price (I've assumed $40), you have your projected revenue from that ad. Subtract that from the cost of the ad and you have your profit or loss. Confusing much, yes? That's why I've included a snapshot of our little excel file...

As you can see, you will probably generate a loss when advertising with Ad #4, and a small profit with the other three ads. I've taken an ad out with a blog that has numbers similar to Ad #1. I'll let you know how it goes...