Should You Renew Your Advertising Purchase? – An Easy Way to Find out

By: Ruth King

I was working with a client recently and we were trying to decide whether an advertising purchase they had made was worth renewing.  “It comes down to the numbers,” I explained.  “If you’ve generated enough revenue to at least break even, then it is worth doing again.”

We did the math – This is Ruth’s Rule #2 and my favorite Ruth’s Rule.

Here are the calculations:

The advertising cost $1800 a month.  The company’s gross margin is 30%.  Therefore, using Ruth’s Rule #2, the company has to generate $1800/30% or $6,000 a month to break even.  Was it doing this?

No, it had NEVER, in a year, generated even $1,000 a month.  So, the answer is to discontinue that advertising method. The company gave it a year trial.  It didn’t work so it has to be discontinued.

Simple.  Black and white.  No emotion.

It came down to the numbers.

So, what are Ruth’s Rules?

I developed them back in the 1990’s to help contractors decide how much revenue has to be generated for any expense to pay for itself or earn the desired company profit.  Over the next few weeks I will explain all of the rules and how to apply them.

Since I started with Ruth’s Rule #2, I am going to take them out of order and continue with Rule #2 rather than begin with Rule #1.

Ruth’s Rule #2:

At break even:  Sales equals overhead cost divided by gross margin.

Let’s apply it to this advertising cost:

Revenues at break even:     $6,000

Cost of goods sold:              $4,200  (70% of sales –gross margin is 30%)

Gross profit                                       $1,800

Advertising Overhead:                   $1,800

Net Profit                                           $0        (the company broke even)

You can use this same formula to calculate the break even revenues needed for any overhead item expense: advertising, your receptionist, legal fees, training, and even your own salary.

I challenge you to take your salary and benefits and divide it by your company’s gross margin to see the revenues needed just to pay you.

I’ll bet the result will surprise you.

Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.