Getting the advertising return on investment calculation correct...

There’s an item missing from the music-marketing dictionary.  What do you call the person that has decided to surrender an email address, follow you on Twitter, or Like you on Facebook?  If the word ‘fan’ is short for ‘fanatic’, or as someone said last week: “a fan is someone that buys all your stuff”, then we need an intermediate descriptor that sits between a potential fan that has yet to learn about you, and a fan or fanatic that is already buying your stuff.  ‘Pre-fan’ seems like it will work, but why bother?

As more and more labels and artists use advertising to bridge the gaps between social media islands, it’s essential to get the advertising return on investment (ROI) calculation correct.  If a potential fan is not yet a fan, and if a pre-fan is not really a fan, then you need to apply TWO conversion rates to your ROI calculation.

Click here to follow along using my Google Docs spreadsheet.

1) The Pre-Fan Conversion Calculation
The advertising cost to reach potential fans is typically priced on a cost-per-thousand impressions (CPM) basis. For each one thousand impressions, a small fraction of potential fans will convert into pre-fans; this is your first conversion rate calculation.

1,000 Impressions * Conversion Rate (CR%) = Total Pre-Fan Acquisitions.  1,000 * 0.2% = 2 Pre Fan Acquisitions

Note: For every 1,000 impressions, the conversion rate (CR%) to a pre-fan is going to be low.  As a point of reference, brand advertisers on the Internet typically obtain ‘click-through' rates that are far less than one percent.

2) The Fanatic Conversion Calculation
The second conversion rate calculation arises when you have to estimate the percentage of pre-fans (those that surrendered an email address, followed you on Twitter, or liked you on Facebook) that will become true fans or fanatics that actually purchase stuff; the conversion rate will vary depending on the engagement platform; I am using a blended Fan-To-Fanatic Conversion Rate of 20% for my example below.

Multiply a Fan-To-Fanatic Conversion Rate * Total Pre-Fan Acquisitions to get Total Fanatics.  20% * 2 = 0.4 Fanatics

Now divide your CPM price by Total Fanatics to yield Cost-Per-Fanatic.  $4.00 / 0.4 = $10 (cost per obtaining each fanatic).

Now Calculate Your Advertising Return On Investment
Estimate the lifetime, combined net profit you will make on merch, tickets, music sales and streaming on a per-fanatic basis.  I am using $100 in my example below.  Subtract your estimate of the lifetime value of a single fanatic from the cost of obtaining each fanatic to estimate the per-fanatic return on your advertising investment.  

$100 - $10 = $90 (your per-fanatic advertising ROI).  You spent $10 to earn $90 over a lifetime. Not bad if you can do it consistently!

What’s Missing?
Many potential fans will not notice and absorb a message until they have seen it more than once.  And, due to the time it takes for fans to absorb new music and for tours to rollout, you have to factor timing and time lag into your equation and into your campaign planning.  In addition, the term ‘lifetime’ is only equal to the projected longevity of you or your band as a branded and performing entity, as hoping to generate ROI solely from music sales three years from now would be highly speculative.

Bruce Warila on Twitter