Formula for Pricing Advertising
The methods for setting advertising rates are similar to those used for pricing most other products and services, but include a few techniques common to the advertising field. In addition to determining what price will help you meet your brand and profit strategies, you must deliver your rates in ways with which frequent advertisers are familiar to help them more easily compare you against your competitors.
The first step in pricing your advertising is to determine the minimum rates you need to make a profit. This starts with knowing your costs to do business and the annual profit you need to make. Determine how much of your revenues must come from advertising to help you make your annual profit goal. For example, if your expenses to run your company and make your product or service will be $200,000 this year and you will make $50,000 from non-advertising sales, you need $150,000 in advertising this year.
To the best of your ability, calculate the number of advertising units you might sell at different prices. For example, if you have a 32-page magazine that comes out six times per year, you might budget 16 pages per issue for advertising. That means you will need to sell each of your 96 pages for $1,562.50 to make $150,000. If you have a blog or website, calculate how much of your advertising space you will sell yourself, how much you will use for pay-for-click programs and how many links you might sell.
Look at what your competition is charging for advertising. Your competition is not only media outlets with similar content, but also any that attract your target advertiser. For example, if local car dealers are a key target for you, find out where they are advertising. If you are a magazine, your competition will include radio and TV stations. List the prices charged by your competitors based on ad size, frequency and placement.
Don’t be afraid to get advice from advertisers. Tell them what your content is, exactly who your readers, listeners, viewers or readers are and what your circulation, visitor, listener or viewer numbers are. Ask them what they would be willing to pay if you deliver this audience to them. Tell them you will be a partner, helping deliver their audience to them.
Advertisers compare different advertising options, in part, based on each one’s CPM, or cost to reach 1,000 customers. For example, if a magazine has a circulation of 15,000 readers and the cost to buy a full-page ad is $1,000, the cost to reach 1,000 readers is $67.00. If a half-page ad is $600, the CPM is $40. Compare your CPM to the CPMs of your competitors to determine if you are competitive or if you need to change your rates. If the quality of your circulation is superior, you might not need a competitive CPM, but will have to address that in your sales materials and presentations.
Using your knowledge of your revenue and profit needs, your competition, your advertisers’ likely spending and your projected sales, set your rates. Build in discounts you might have to offer, such as 10 percent off if an advertiser buys an annual schedule, free color, free website banner ads with the purchase of print, radio or TV ads or other bonuses for multiple ad purchases.