There's that famous line to the effect of 'half the money I spend on advertising is wasted; the problem is I don't know which half'. But in these days of big data and analytics, is that still really the situation?
Professor Harald van Heerde, a research marketing Professor at Massey University's Albany campus, says it's still as relevant today as when it was first uttered more than 100 years ago.
"The problem is that advertising decisions are often based on gut feeling, or on what competitors do or on what has been done in the past," van Heerde says. "Very few managers know how effective their advertising is in terms of reaching their sales targets or other objectives."
This week I've interviewed a handful of small business owners about advertising - specifically, about how much they spend, where they spend it, and how they measure the return on that investment.
There's a huge number of places where you can spend your advertising dollar: direct mail, Google Adwords, vehicle signage, radio, magazines, newspapers, Facebook, LinkedIn and billboards are among the options the business owners interviewed had tried.
The most popular strategy mentioned, however, was the classic 'word of mouth'.
Jeremy Wyn-Harris, co-founder of Canterbury-based online business Builderscrack.co.nz, sums up the sentiment expressed by many.
"Our most effective advertising isn't really advertising at all - it is customer word of mouth," says Wyn-Harris. "Customer referrals are our largest and most effective source of new customers, so our prime focus is to give customers a great experience, and we know they then tell their friends."
Wyn-Harris says the company spends about one-fifth of revenue on advertising, spending the largest proportion on Google AdWords.
"Over time we have trialled radio, print, billboards and other forms of online advertising like banner ads and Facebook," he says. "Radio works well in terms of building brand awareness, but getting people to transition from the offline world to the online world is not very efficient. For us as a online service, it is more efficient to let customers know about us when they are online already."
Stephanie Evans, founder of Canterbury-based beauty products firm Oasis Beauty, currently spends around 3% of annual turnover on advertising. The firm places ads in trade publications, local newspapers and national magazines, and has dabbled with radio advertising. However the firm mainly invests in Google AdWords and Facebook advertising.
"Both have excellent reporting so we can easily see whether the ads have been successful or not and we can set the exact amounts we want to spend," says Evans.
That ability to easily track, analyse and adjust advertising spend accordingly was a factor a number of small business owners mentioned when talking about why they had chosen online advertising channels. But no matter where you're spending your advertising dollar you should be keeping tabs, says van Heerde
"It is very important to keep track of your advertising spend - either per week or per month - and your performance measure, such as awareness, sales, or something else," he says. "If you store these figures for long enough, let's say for a year, you can work out the impact of advertising on performance."
Advertising - Professor Harald van Heerde, Massey University
Professor Harald van Heerde is a research marketing Professor at Massey University's Albany campus.
There's that famous line to the effect of 'half my money is wasted on advertising; the problem is, I don't know which half', but is that really the case?
That quote goes back to an American department store owner from around 1880, and it is as relevant today as it was back then. The problem is that advertising decisions are often based on gut feeling, or on what competitors do or on what has been done in the past. Very few managers know how effective their advertising is in terms of reaching their sales targets or other objectives.
How much should a small business be spending on advertising and what are some of the considerations for working out an ad budget?
A first big consideration is to be clear in what you want to achieve with your advertising. If you are new in the business, maybe you want to gain awareness. If you are an established company you may want to gain sales. Once you have set your goal, you can do some market research or make an educated guess about your current performance - this could be your awareness levels in the market or your current sales level. You can then set yourself a target - for example, I want to increase my performance by 10 per cent through advertising.
For the few companies that have measured their return on advertising - how performance improves for every 1 per cent more spent on advertising - you can now work out how much to spend. Otherwise you can follow this rule of thumb: for every 10 per cent increase in performance, you need roughly a 50 per cent increase in advertising budget. So, suppose you spend $1000 per month. If you want to raise the awareness by 10 per cent, you will need to lift your advertising budget by 50 per cent, so that it becomes $1500 per month. But do note this is a crude average; in some cases it can be less, in some cases it needs to be more.
Once they've worked out a budget, how should SME owners go about deciding where to spend it?
Of course you have to know how your clients make decisions and where they look for information. Most people nowadays look online for information rather than using the traditional channels. So, if I was a small business owner where a lot of potential customers rely on the internet, I would really invest in a very good website backed up by a professional sales team and some targeted search advertising. Another very important thing to invest in is tracking online reviews, especially if you are in the hotel or restaurant sectors. It is very important to handle negative reviews quickly and professionally.
What are some of the ways SMEs can quantify the impact of their advertising spend?
It is very important to keep track of your advertising spend - either per week or per month - and your performance measure, such as awareness, sales, or something else. If you store these figures for long enough, let's say for a year, you can work out the impact of advertising on performance. An Excel spreadsheet is all that's needed. The impact of your advertising can be worked out with relatively straightforward methods such as regression analysis.
The need to do this type of analysis is only going to grow, so that's why we are now setting up a new Master of Business Analytics at Massey - and one of the core papers will be measuring the return on marketing investments.
What are some of the trends in terms of advertising effectiveness for small businesses? Are there some channels that are proving more effective than others?
One big trend is that the return on investment from traditional advertising, like print media, television and radio, has roughly halved in the past few decades. Some recent research suggests that paid search advertising, search engine optimisation and retargeted advertising - that is, banner advertising based on cookies - are, relatively, more effective than traditional advertising. Of course, you have to make sure that your website is professional and appealing, otherwise you will not get the business when people click-through.
Coming up in Small Business: Employee share schemes are an increasing trend, particularly in the technology sector. Why and how have some small businesses implemented these? If you've got a good story to tell, drop me a note: firstname.lastname@example.org