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« How A Major Label Markets A New Artist | Main | How to Communicate With Fans So You Connect With Them (Instead of Bore Them to Tears) »
Monday
Oct312011

Getting the music advertising ROI 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

Reader Comments (17)

Fascinating artlcle indeed and food for thought. I think we need to use tools and formulae such as what you have used as a powerful ingredient in our marketing plan. Even the infomercial model can be used. It is a case of right tool for the job.

October 31 | Unregistered Commenterkehinde

This is an interesting concept, however, how do these figures then translate to how the fan actually supports the artist/band monetarily? I'd be interested in seeing another set of variables where we see if fans actually do convert and make a purchase...wouldn't this be a more accurate representation of a fan?

Most people I know will surrender an email to get access to a free item, then immediately remove themselves from an email list, or some have specific email addresses for such purposes that they only use to gather free access to things.

As far as twitter et al, I'm not sold that followers necessarily mean fans, I've been in bands that sell out mid sized venues without a twitter account, I've seen bands with huge accounts cancel tours for low ticket sales. Then, again this could be a semantic argument, I guess I equate a true "fan" as a patron who will support the artist with some sort of monetary contribution, whereas this set of beta looks at the more speculative set of data of general public awareness.

October 31 | Unregistered Commentergaetano

This is less useful than it appears. The 'return' calculated is actually just revenue generated per fan. This is somewhat useful, but if you spend a ton of money producing high quality music videos or whatever, your return is far less per fan.

Basically, you need to include your expenses to get a more accurate estimate of your return. An ROI calculation should measure how much money you'll have at the end of the day, after expenses. There are costs to the merch bands sell and significant expenses associated with touring and music production. Failing to capture those costs could turn a profitable-looking band into a big cash loser pretty quickly if the conversion rate isn't high enough.

I'd be interested in seeing a more thorough analysis.

October 31 | Unregistered CommenterMatt

I don't want to pour cold water on your figures, but, the Conversion Rate for the Pre-Fan is much more like 0.06% for a band. 0.2% would be and is one of those "20%-80%-urban-myth" handy figures plucked out of the marketing world and much bandied about (actually it's 0.1%-0.3%). However, a sustained 0.3% CR would be an extremely good CR for an affiliate website.

Of course everything would change with correct 'Targeting'!

There are also a lot of variables when calculating CR to CPM and that's why I think that this post is a little misleading - Sorry Bruce.

I don't know what's misleading about the post? If you are going to advertise, you need to apply two conversion rates when you making your ROI calculation. Use any numbers you want, you still need to achieve two conversions.

As a matter of fact, I got the pre-fan 0.2% by HAIRCUTTING the results we have been consistently obtaining over the last year via the use of music-preference-based behavioral targeting. I don't think we have EVER failed at obtaining over a .2% CTR.

I don't mind debate, but if you want to comment on my posts, try not to sound like such a prick. I am hear to help, not to get into my-numbers-are-longer-than-yours contests. Next time ask me for more detail prior to accusing me of being misleading.

October 31 | Registered CommenterBruce Warila

@Matt. Your point is very valid. Advertisers should consider overall ROI. I thought that would be obvious though, as the calculations provided on the attached spreadsheet only cover advertising costs. I hope most people would know to consider everything else?

The point of the post was to simply tell people they need to apply two conversion rates instead of one, which is a mistake I often see music advertisers making.

October 31 | Registered CommenterBruce Warila

Good post, Bruce. Hope you don't mind me expanding on one of the underlying concepts here...

It's really important to understand that not all 'fans' (or pre-fans, for that matter) are created equal. There are a variety of reasons for this - one of which is how they were introduced to you and your music.

For example, it is likely (although not guaranteed) that fans who were introduced to your music via a recommendation from a friend might have a higher likelihood of 'converting' into a true fan than those who were introduced by an advertisement you were running. i.e. the 'source' matters.

As a result, it's critical that you track the conversion rates of 'pre-fans' from each source separately, and not assume that they are the same across sources.

I know this is a ton of "marketing speak" to digest, but I encourage you to bite down on it hard and really learn it if you believe that great marketing is going to be important to your success.

Jed Carlson
Co-Founder & COO, ReverbNation

November 1 | Registered CommenterJed Carlson

I like the discussion about ROI. It demonstrates an interest in operating ones music career as a business (It is many businesses actually). There certainly are two conversion rates in this equation. Thanks for pointing that out Bruce. I would love to add one thing to this equation that would speak to the OP and to Jed Carlson's comment. Not only is important to track where your pre-fans are coming from (although the post is talking about pre-fans from advertising, so, I am slightly confused why Jed's comment is entirely relevant) but when calculating the lifetime value of a fan, you need to take into consideration the viral conversion rate as well. For instance, if there is 1 fan for every 10 collected that is successful in bringing in one other fan than the that factor would be 1/10 of .4 or .004 additional fans obtained through advertising.

Just adding my 2 cents about fan acquisition... While a particular avenue of fan acquisition may seem inconvenient or expensive, if more fans are brought in indirectly this is ultimately good for the bottom line. One must track and test everything in order to know what is actually happening (direct marketers credo) Food for thought.

Tom Siegel, Indie Leap

November 2 | Unregistered CommenterTom Siegel

I want to expand on what Jed said as well. I went to a Facebook page for an artist the other day and it required me to "Like" that artist just to hear their music. I left without listening. However, I imagine some people do Like the artist just to listen to their music, but that has to be about the worst quality "fan" you could have.

So, I do think the way in which they are acquired ought to be something people consider. It would be interesting to explore ways to find out how loyal fans from different sources are.

Joey Flores
Earbits.com

"...bite down on it hard and really learn it if you believe that great marketing is going to be important to your success".

And if you don't, please don't complain about your lack of a career - after all, this is, uh, the music BUSINESS.

Regardless of opinion on the numbers presented, the concept is illuminating and definitely worth further study - and experimentation to find the exact formula that works with each artist. Thanks for the food for thought, Bruce.

November 2 | Registered CommenterDG Gutekunst

It's nice to walk through the steps of how to calculate these things, but the numbers are very arbitrary unless given a huge set of data to work from. Not to mention estimating the lifetime value of a fan in such a way is very tough. CTR/CPC/CPM is going to vary drastically from platform to platform and the quality of your clicks will vary from platform to platform as well. While this exercise is good in a way, I think it's a generalization that might not help in most cases. Before calculating lifetime value of a fan, maybe do more directly measurable ads (target people to buy concert tickets ---> calculate how many you sell compared to marketing spend and other expenses).

November 2 | Unregistered CommenterJonathan Jaeger

@ Jed - agreed. All clicks are not created equal :)
@ Tom - fantastic point to consider.
@ Joey - more research is needed by everyone.
@ DG - ditto on experimentation and research..
@ Jonathan - agreed. Hopefully there will not be many that use my tidy calculations as a blunt force decision making tool.

November 3 | Registered CommenterBruce Warila

The article and comments are all stimulating for sure. I hope to add one more. When determining ROI, in an absolute sense sans the very important segmentation of those fans, lifetime value, etc.. (i.e. I spent $2000 for a two week campaign to acquire fans/likes on Facebook and we added 4,000 new fans). You might say that campaign had a return of .50 (2000 divided by 4000). And you'd use that as a benchmark to consider other campaigns and develop some sense of productivity/effectiveness from that.

The concept I'd like to advance is that you have to look at whatever goal you have (say fans), and then consider what the ROI is for "created fans" - which now takes into account what you would have acquired anyway without spending any money/resource.

So if you were acquiring new fans on Facebook at a average rate of 400 per week over let's say the last 4 weeks, then if your two week campaign generated 4000 new fans at a cost of $2,000, you have to consider that you would have added 800 anyway, so your campaign generated 3200 new fans/likes at an return of .625 (2000 divided by 3200) and not .50. The main point is, regardless of how you do your math (as long as it is consistent), is to not use raw #'s when constructing your measurements and consider ROI in a net sense of what was created beyond what would have happened anyway (on average). Then you start to get a clearer picture of your spent resources and results.

November 3 | Unregistered CommenterColin

I always like to go "cost per click" over "cost per 1000" as I feel like then I have a better ROI. Especially with ad blockers blocking ads on so many sites.

I think that the .2% conversion is about right for plenty of things, though my experiences have been a bit lower (probably .05%) & I think that is because of how obscure & out a lot of things on Silber Records are. But I do think the number of pre-fan to fan conversions is pretty high. I think these days I'll get 2000 paid clicks in a month & when I run such a campaign it seems to draw an additional 5-10 orders in that month. Of course this is just my personal experience & only one anecdote.

I feel as if there are other factors to consider here as well. When you run an ad on a cost per click basis with relevant targeting it can have some power in name recognition. Under the right circumstances, you can have the ad or banner show up to the same user multiple times. Even without clicking on it there is an introduction to at least the name. Although most people don't become fans from name recognition, the marketing makes a person more likely to convert to a fan in the future.When looking at hundreds of thousands or millions of impressions this name recognition has to have an ROI, specifically when targeted at touring markets. It may be small, but i think an important factor in this calculation. Makes the number of impressions a much more relevant part of the calculation.
Just a thought.

November 6 | Unregistered CommenterDavid Risman

@ David Risman
I actually did a pay per click campaign for my noise band at the specific markets of a tour. It was pretty effective in that it showed how small some markets presumably were based on how many similar artist fans there were in the cities & at a penny a click & think I got a few thousand impressions for about $1. Though no one came up & said they were at the show because of a Facebook ad, I like to think one person was....

@ David.. Yeah good point. We try to measure view-throughs (those that viewed, but visited later), but that involves getting artists to put some lightweight tracking code into their sites for view-through tracking. We don't encounter an objection to tracking, it's the technical challenge of inserting a single line of header code (JavaScript) into the right place that we run into.

I don't know the exact percentage, but there is a sizable chunk of humanity that will not click an ad, as they prefer to type the URL into the browser. This is one reason why advertisers should make their click-through URL visible and simple.

November 7 | Registered CommenterBruce Warila

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