Post by shukla on Oct 28, 2024 22:58:06 GMT -5
In marketing, there are metrics that analyze the cost and effectiveness of advertising. These are both monetary indicators (for example, the cost of one click) and relative ones (for example, the return on marketing investment). In this article, we will consider the DRR indicator - the share of advertising expenses.
What is DRR and why is it considered?
The DRR indicator evaluates the amount of advertising expenses, but not in absolute terms, but in relative terms, comparing advertising expenses with the income received from it. It is not enough for an entrepreneur to simply know that advertising brought him a million rubles in revenue - after all, to earn this million, one company will spend 100 thousand, and another - 900.
DRR formula:
Share of advertising expenses = (Advertising expenses/Revenue)*100%
This indicator is especially often used in online trading.
Anton Kalabukhov , marketing expert:
“Often, a similar method of assessing advertising activity is used in online website development service stores, since there is direct advertising and instant purchases, that is, you can immediately assess how much was spent and how much income we received.
But what if we, for example, work in a development company? Let's imagine a situation: we spent 100 thousand rubles, received 50 applications, some of them will reach sales, someone will sign a contract and may or may not buy an apartment. Several months may pass from the application to the sale of the apartment, so in this case it is very difficult to estimate the DRR - the money is spent, but there is no income yet. If we consider an online store, then the purchase is made immediately, that is, "application" = "purchase": spent 100 thousand rubles, received purchases for a million, accordingly, the DRR is 10%"
The lower the indicator, the higher the advertising effectiveness (we will consider some nuances below). The Internet advertising market is dynamic, large budgets are spent on advertising, and it is important to see whether these costs pay off. Simply knowing that advertising works is not enough, it is important to evaluate how effectively it works.
Calculation and interpretation of the DRR can answer, for example, the following questions:
•
How to distribute the advertising budget between different channels?
•
Is the overall advertising strategy for a product or service effective?
•
Which advertising channel caused the decrease in conversion?
Let's look at calculating the share of advertising expenses using examples.
Calculation examples
Let's say an entrepreneur opened a small store where he sells only one product - chocolate bouquets. The business is just starting to develop, the budget is very small, and in the first month the entrepreneur used only one advertising channel - targeted advertising, spending 50 thousand rubles on it.
At the end of the month, the income was 70 thousand rubles. We calculate the DRR using the formula:
DRR 1 = (Expense / Income) * 100% = (50,000 / 70,000) * 100% = 71%
In the second month, the entrepreneur decided to increase advertising expenses and invested 80 thousand in targeting, and his income increased to 100 thousand. It seems that an increase in income is good news, but let's calculate the DRR for the second month:
DRR 2 = (Expense / Income) * 100% = (80,000 / 100,000) * 100% = 80%
Here we see that not only the entrepreneur's income has grown, but also his advertising expenses. And not only in absolute terms, but also in relative terms - their share in revenue has also increased, that is, advertising has become less effective.
The entrepreneur continues to grow and decides to use more and more advertising channels, and by the third month of operation there are already three of them:
•
targeted advertising;
•
short radio spots;
•
advertising banner on the neighboring street.
He spent 90 thousand on targeted advertising and received 110 thousand in income from it. He invested 130 thousand in radio commercials and received 140 thousand from sales. Finally, the advertising banner, for which the businessman paid 30 thousand, brought in 60 thousand in revenue:
Share of advertising expenses - table 1
Total advertising costs were 250 thousand, and income was 310 thousand.
Radio advertising brought in the most sales and it seems to have worked the best. But let's calculate the ADR again.
Share of advertising expenses - table 2
The effectiveness of targeted advertising remained at about the same level, but radio advertising paid for itself, but only slightly - the sum of expenses on it and the return in the form of income are almost equal. The costs of the banner paid for themselves almost twice, that is, this advertising channel became the most effective. It seems that the entrepreneur should think about redistributing the advertising budget - perhaps it is worth giving up radio commercials.
How to cut costs without harming your business?
Download the free guide "16 ways to reduce company expenses", save thoughtfully and earn more. Prepared by financial experts PlanFact.
Download for free
What you should not forget when calculating the DRR
It seems that there is nothing simpler than calculating the share of advertising expenses - take two numbers and divide one by the other. But in practice, the formula conceals many nuances. Let's consider the main ones.
Collect all income and expenses correctly
It is important not just to take the total amount of income from the financial accounting program, but to correctly distribute it between those sales channels for which you want to calculate the DRR.
This can be done in different ways: ask the buyer directly where he learned about you (for example, send him a questionnaire with this question after the purchase), or connect end-to-end analytics in CRM.
Alexey Gamov , head of the digital marketing agency WebValley Studio, explains where to start collecting data for calculations:
"The budget spent on advertising can be seen in the advertising account. Income data is in the CRM or accounting system, for example, 1C. This is the minimum set that you can work with if you have one product and one traffic channel. But, as a rule, a business is more complex, and for an accurate calculation, you need to install an end-to-end analytics system that will allow you to track the source from which the application, call, or transition to the messenger came"
In terms of income, it is important to take into account not only a one-time purchase, but also all the revenue that a client brings you - not only their first purchase, but all subsequent ones as well.
What is DRR and why is it considered?
The DRR indicator evaluates the amount of advertising expenses, but not in absolute terms, but in relative terms, comparing advertising expenses with the income received from it. It is not enough for an entrepreneur to simply know that advertising brought him a million rubles in revenue - after all, to earn this million, one company will spend 100 thousand, and another - 900.
DRR formula:
Share of advertising expenses = (Advertising expenses/Revenue)*100%
This indicator is especially often used in online trading.
Anton Kalabukhov , marketing expert:
“Often, a similar method of assessing advertising activity is used in online website development service stores, since there is direct advertising and instant purchases, that is, you can immediately assess how much was spent and how much income we received.
But what if we, for example, work in a development company? Let's imagine a situation: we spent 100 thousand rubles, received 50 applications, some of them will reach sales, someone will sign a contract and may or may not buy an apartment. Several months may pass from the application to the sale of the apartment, so in this case it is very difficult to estimate the DRR - the money is spent, but there is no income yet. If we consider an online store, then the purchase is made immediately, that is, "application" = "purchase": spent 100 thousand rubles, received purchases for a million, accordingly, the DRR is 10%"
The lower the indicator, the higher the advertising effectiveness (we will consider some nuances below). The Internet advertising market is dynamic, large budgets are spent on advertising, and it is important to see whether these costs pay off. Simply knowing that advertising works is not enough, it is important to evaluate how effectively it works.
Calculation and interpretation of the DRR can answer, for example, the following questions:
•
How to distribute the advertising budget between different channels?
•
Is the overall advertising strategy for a product or service effective?
•
Which advertising channel caused the decrease in conversion?
Let's look at calculating the share of advertising expenses using examples.
Calculation examples
Let's say an entrepreneur opened a small store where he sells only one product - chocolate bouquets. The business is just starting to develop, the budget is very small, and in the first month the entrepreneur used only one advertising channel - targeted advertising, spending 50 thousand rubles on it.
At the end of the month, the income was 70 thousand rubles. We calculate the DRR using the formula:
DRR 1 = (Expense / Income) * 100% = (50,000 / 70,000) * 100% = 71%
In the second month, the entrepreneur decided to increase advertising expenses and invested 80 thousand in targeting, and his income increased to 100 thousand. It seems that an increase in income is good news, but let's calculate the DRR for the second month:
DRR 2 = (Expense / Income) * 100% = (80,000 / 100,000) * 100% = 80%
Here we see that not only the entrepreneur's income has grown, but also his advertising expenses. And not only in absolute terms, but also in relative terms - their share in revenue has also increased, that is, advertising has become less effective.
The entrepreneur continues to grow and decides to use more and more advertising channels, and by the third month of operation there are already three of them:
•
targeted advertising;
•
short radio spots;
•
advertising banner on the neighboring street.
He spent 90 thousand on targeted advertising and received 110 thousand in income from it. He invested 130 thousand in radio commercials and received 140 thousand from sales. Finally, the advertising banner, for which the businessman paid 30 thousand, brought in 60 thousand in revenue:
Share of advertising expenses - table 1
Total advertising costs were 250 thousand, and income was 310 thousand.
Radio advertising brought in the most sales and it seems to have worked the best. But let's calculate the ADR again.
Share of advertising expenses - table 2
The effectiveness of targeted advertising remained at about the same level, but radio advertising paid for itself, but only slightly - the sum of expenses on it and the return in the form of income are almost equal. The costs of the banner paid for themselves almost twice, that is, this advertising channel became the most effective. It seems that the entrepreneur should think about redistributing the advertising budget - perhaps it is worth giving up radio commercials.
How to cut costs without harming your business?
Download the free guide "16 ways to reduce company expenses", save thoughtfully and earn more. Prepared by financial experts PlanFact.
Download for free
What you should not forget when calculating the DRR
It seems that there is nothing simpler than calculating the share of advertising expenses - take two numbers and divide one by the other. But in practice, the formula conceals many nuances. Let's consider the main ones.
Collect all income and expenses correctly
It is important not just to take the total amount of income from the financial accounting program, but to correctly distribute it between those sales channels for which you want to calculate the DRR.
This can be done in different ways: ask the buyer directly where he learned about you (for example, send him a questionnaire with this question after the purchase), or connect end-to-end analytics in CRM.
Alexey Gamov , head of the digital marketing agency WebValley Studio, explains where to start collecting data for calculations:
"The budget spent on advertising can be seen in the advertising account. Income data is in the CRM or accounting system, for example, 1C. This is the minimum set that you can work with if you have one product and one traffic channel. But, as a rule, a business is more complex, and for an accurate calculation, you need to install an end-to-end analytics system that will allow you to track the source from which the application, call, or transition to the messenger came"
In terms of income, it is important to take into account not only a one-time purchase, but also all the revenue that a client brings you - not only their first purchase, but all subsequent ones as well.