Article

What Should My Cost Per Sale Be? The Flaw in Calculating Advertising Cost Per Sale

March 2008, Auto Dealer Today - WebXclusive

by Rob Anderson - Also by this author

This is the only question you need to ask if you want to increase your advertising efficiency. While at a convention a few years ago, I was talking to a dealer and he was asking me about our leads. At the time, we were selling TV leads for $50 apiece. I simply said if a sub-prime dealer buys 100 leads from us, he could expect to sell 10 cars. Someone overheard our conversation and said, “That’s $500 per car sold! That’s way too high.” The offending gentleman makes his living as a sub-prime consultant. I replied to my unprovoked attacker, “What should it be?” He said, “Less than $350 per car sold.” He gave this number because it was, at the time, the national average. So a dealership spends $35,000 on advertising and sells 100 cars a month and that’s good? This is the way everyone does it and has done it for years and it is flawed. It is problematic because people who have not been touched by your advertising message purchase a percentage of those 100 cars.

In order to find an accurate cost per car sold, you have to begin by making some assumptions. Here is a sample chart:

Percentage of sales from repeat business:   20 percent
Percentage of sales from drive-by traffic:   15 percent
Percentage of sales from referrals:  10 percent
Total percentage of sales not generated from advertising: 45 percent
                  
If we go back to the example of a dealer who sells 100 cars a month and spends $35,000, we see that 45 of this dealer’s 100 cars sold had nothing to do with advertising. So, the true cost per car sold is revealed when we divide $35,000 by 55. That is the number of cars sold as a direct result of advertising. The true cost is $636 per car sold. You might be asking yourself, why figure out the cost relating to units sold just from advertising? I know when I lump it all together and I’m at $350 per car sold, my advertising must be working. The more accurately you track the true cost, the better equipped you will be in terms of managing new campaigns and finding out what is working best for you. That increases efficiency in your advertising, and you don’t have to spend one thin dime to do it.

As always, accountability and tracking play a major role in determining your true cost per car sold. Put a different phone number on anything and everything you run. Call response is your first indicator. Starting from the top down, use a call tracking service; then, move downstream and look at your customer base. Drill down the repeat business, drive-by traffic and referral business as best you can. These areas are never going to be an exact science. Assumptions will have to be made, but it will still get you closer to the true cost per car sold than just taking your advertising budget and dividing it by total units sold. 

Distinguishing direct advertising sales from sales generated by repeat, drive-by, and referral business is critical for you. I suggest you begin to make assumptions right now as I have done in the table above. I normally dismiss asking your customers how they heard about you, but in this case, it will help. Go ahead and do it. Never use it as a barometer to determine which of your multiple advertising mediums and campaigns work best. However, let your customers guide you when it comes to making assumptions about your true cost per car sold.

You may find out that 60 percent of your business is generated by repeat, drive-by and referrals. If you are in a great location, this may be the case. If you are at $800 or $1,000 per car sold, it doesn’t need to be a cause for alarm because these are numbers are not all that uncommon. Moreover, you need to get closer to the truth if you are going to make your advertising more efficient. Before you figure out which campaigns, promotions and programs work better for you than others, you have to figure out if anything is working at all.

To consider which customers buy because of an offer or promotion versus referral, drive-by and repeat may seem like the most basic analysis in advertising and marketing. It may be, but it is an area to monitor and take very seriously. Get back to the basics. This time make sure you get calculate an accurate cost per car sold because it really is the most important number in automotive marketing. Even the guy who was knocking my leads at the convention knew the importance of this concept. However, he just didn’t know how to get to the true number. Now you know how!

Vol 5, Issue 2

Comment

  1. 1. Joe Merolillo [ December 07, 2013 @ 05:57PM ]

    Great article,After 20 years in the business I figured this out.I went through the paradise shift in the car business.New technology
    Has made us rethink our advertising,and really track it closely.Especially when payroll is based on variable expenses.
    Joe Merolillo

 

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