[Slide 1]
“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
This popular quote sums up the problem with advertising.
[Slide 2]
There are many advertising choices today including not advertising, relying on word of mouth and other “organic” growth. Is the advertising working?
[Slide 3]
Proxy measures such as link clicks can be highly misleading. A bad advertisement can get many clicks, even likes but reduce sales by making the product look bad in an entertaining way.
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[Slide 4]
Did the advertising increase sales and profits? This requires analysis of the product sales and advertising expenses from your accounting program such as QuickBooks. Raw sales reports are often difficult to interpret unless the boost in sales is extremely large such as doubling sales. Sales are random like flipping a coin. This means a small but profitable increase such as twenty percent is often difficult to distinguish from chance alone.
[Slide 5]
Statistical analysis and computer simulation of a business can give a quantitative, PREDICTIVE answer. We can measure the fraction of days with zero, one, two, or more unit sales with advertising — the green bars in the plot shown — and without advertising, the blue bars.
[Slide 6]
With these fractions, we can simulate the business with and without advertising.
The bar chart shows the results for one thousand simulations of a year of business operations. Because sales are random like flipping a coin, there will be variations in profit from simulation to simulation due to chance alone.
The horizontal axis shows the change in profits in the simulation compared to the actual sales without advertising. The height of the bars shows the FRACTION of the simulations with the change in profits on the horizontal axis.
The blue bars are the fractions for one-thousand simulations without advertising.
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The green bars are the fractions for one-thousand simulations with advertising.
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The vertical red bar shows the average change in profits over ALL the simulations WITH THE ADVERTISING.
There is ALWAYS an increased risk from the fixed cost of the advertising — $500 per month, $6,000 per year in this example. The green bars in the lower left corner show the increased risk with advertising compared to the blue bars without advertising.
If the advertising campaign increases profits on average and we can afford the increased risk, we should continue the advertising.
[Slide 7]
This analysis was performed with Mathematical Software’s AdEvaluator Free Open Source Software. AdEvaluator works for sales data where there is a SINGLE change in the business, a new advertising campaign.
Our AdEvaluator Pro software for which we will charge money will evaluate cases with multiple changes such as a price change and a new advertising campaign overlapping.
[Slide 8]
AdEvaluator is available on our web site:
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Click on the Downloads TAB for our Downloads page.
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AdEvaluator can be downloaded from GitHub or as a ZIP file directly from the downloads page on our web site.
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Or scan this QR code to go to the Downloads page.
This is John F. McGowan, Ph.D., CEO of Mathematical Software. I have many years experience solving problems using mathematics and mathematical software including work for Apple, HP Labs, and NASA. I can be reached at ceo@mathematical-software.com
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Technical Article: http://wordpress.jmcgowan.com/wp/how-to-tell-scientifically-if-advertising-boosts-sales-and-profits/
(C) 2019 by John F. McGowan, Ph.D.
About Me
John F. McGowan, Ph.D. solves problems using mathematics and mathematical software, including developing gesture recognition for touch devices, video compression and speech recognition technologies. He has extensive experience developing software in C, C++, MATLAB, Python, Visual Basic and many other programming languages. He has been a Visiting Scholar at HP Labs developing computer vision algorithms and software for mobile devices. He has worked as a contractor at NASA Ames Research Center involved in the research and development of image and video processing algorithms and technology. He has published articles on the origin and evolution of life, the exploration of Mars (anticipating the discovery of methane on Mars), and cheap access to space. He has a Ph.D. in physics from the University of Illinois at Urbana-Champaign and a B.S. in physics from the California Institute of Technology (Caltech).