I met with a lawyer last week who explained that she had done some television advertising recently.

The ads cost her $12,000.

“They worked,” she explained, but not very well.

“What do you mean?” I asked.

She was losing money and didn’t even know it…

She told me that the firm generated $12,000 in new business from the ads so they had reached the break-even point. She was discouraged that the ads hadn’t worked even better.

I slowed her down and explained that she hadn’t reached the break-even point. In fact, I explained, she had lost a lot of money.

Here’s the deal.

The ads cost $12,000.

The new cases generated $12,000 in revenues.

Doing the work on the new cases will cost about $5,500 in labor expenses to those directly and indirectly involved.

The firm will spend another $3,000 on general overhead like rent, copier leases, office supplies, malpractice insurance, and so forth related to those cases.

That leaves $2,500. That’s the money we use for marketing, and whatever remains is profit.

Therefore, on the $12,000 expense for TV ads, she lost about $9,500. Not a good deal.

There’s a formula.

Let’s talk in concepts and broad generalizations.

For marketing to “work,” it’s got to generate more than 8 times the cost. If you spend $12,000 on TV ads, you should generate $96,000 in revenue. Otherwise you’re wasting your money: in fact, you’re wasting the advertising money and more.

Where did I come up with “8 times?” That figure is based on a marketing budget of about 12.5% of revenues. That’s high but not unheard of. Many firms spend less than a quarter of that amount. If, at the conservative end of the spectrum, you’ve budgeted only 3% of revenues for marketing, then you need to generate about 30 times the marketing expense as revenue to break even.

Breaking even does not mean recovering the expense of the marketing. Breaking even requires you to generate enough revenue to cover the costs of the marketing along with all of the other associated expenses. Breaking even gets you back to zero, and you still haven’t made a profit. You need to do better than break even, and you certainly can’t afford to lose money on marketing.

You can complicate this analysis. You can rationalize expensive marketing that doesn’t work. But if all you’re doing is making back the money to pay for the marketing, then you’re working for the seller of the marketing. You aren’t working to benefit you. That’s not a good situation.

If all you do is break even, you lose. You need to create a marketing scenario that leaves you with profit.