“HOW MUCH!”

We hear these two words loud and clear almost every day. And they’re usually followed by a long period of silence.

The reason for this outburst is that we’ve just told a potential client that an investment in touch screen-enabled digital signage can easily cost over $10,000 for just one screen.

After they’ve recovered from the shock, we go on to tell them that the cost really isn’t very much at all. And what they need to take into account is not how much the digital signage costs, but how much return it will bring.

Let’s look at it differently: If you paid $10,000 for just one touch-screen enabled digital screen and that screen generated enough sales to make you a profit of say, $20,000, would $10,000 be too much to spend?

The answer, of course, is NO, it would not.

Here’s a step-by-step process we use to help our clients work out whether the cost of investing in digital signage is too much, or whether they’re getting a bargain.

Step oneWork out how much gross profit you make on every sale. For example, if you buy the product you sell at $50 and sell it for $100, your profit is $50.

Step two

Determine your closing ratio. Say you close, on average, one sale for every four people who respond to your digital sign, your closing ratio is 25%. If you close 9 out of 10, it’s 90%.

Step three

Figure out your break even point. Divide the cost of your digital signage investment by the amount of gross profit in step one. For instance, if your signage costs $10,000 and your gross profit is $50 that means you need to sell 200 products to cover the cost of the signage, or break even.

Step four

Work out the number of inquiries you need to break even. To do this you need to take your closing ratio - the number of people who buy your product after they’ve responded to your digital signage advertising. Let’s say it’s one out of every four people, or 25%. If you close one out of four people and you need sell 200 products to break even, then your $10,000 digital signage investment needs to generate 800 leads.

While it may sound a little complicated, it’s actually quite simple. All I’ve done is used simple math to work out how (in this instance) a $10,000 digital signage investment needs to generate 800 inquiries to cover the amount you paid for it.

Of course, we’re all in business to make a profit so breaking even isn’t going to cut it, so let’s take it a step further.

Say, you want to double the money you invested in your digital signage. What happens to the numbers then? You have to double your inquiries. In this case, your digital signage must generate 1600 leads instead of 800 - 1600 leads will generate a profit of $20,000. This is where it starts to get interesting because the return on your investment is now 100%. You have doubled your money.

But let’s take it even further. Let’s work out the lifetime value of one satisfied customer.

For arguments sake, let’s say that an average customer generates a profit of $50 per sale. Will that customer only ever buy from you that one time? I hope not. How many times will they come back in the course of say a year, and buy from you again?

Let’s say they buy from you once a month, and you make a profit of $50 every time they buy, your average customer makes you $600 a year.

And, if they continue to buy from you over the next two years, the $50 they spend a month is now worth $1,200. Three years and it’s worth $1,800, and so on.

Now, work out your profit using the numbers we calculated earlier - 800 inquiries and 200 sales. If you keep all 200 customers coming back once a month for three years, your $10,000 advertising spend has generated you a profit of $360,000.

And, if every $10,000 digital screen in different locations generates the same return on investment ($360,000) your digital signage has paid for itself many time over, and generated you a huge profit.

So, now do you think that investing in digital signage costs too much? I doubt it.

Go ahead, work out your numbers!

A word of caution

When calculating your figures, calculate on the low side. Then you’ll still do OK if your results are lower than you expected. And, if you do better than you thought… well you’ll get that dream vacation you’ve been promising yourself!

Tags: digital out-of-home, Digital Signage, digital signage content, digital signage costs, digital signage deployment, digital signage revenue, DOOH, retail digital signage, touch-screen digital signage

This entry was posted on Wednesday, April 8th, 2009 at 12:33 pm and is filed under Digital Signage. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.