Bill started a new tile-installation business. To increase sales, he decided to place a display ad in the local metropolitan paper. The cost was $1,200 a week. That was a lot of money for Bill, so he was reluctant to commit to running the ad for more than one week. But the sales representative – we’ll call him “Fast Freddy” – was adamant. If Bill wanted his marketing campaign to work, he needed to run the ad repeatedly. He convinced Bill that advertising results don’t always come in right away. First, “awareness” has to be built. So Bill agreed to give it a try. And here’s what happened …

Week One: Bill received two calls and set up two “free estimate” appointments – but, unfortunately, didn’t book either job. Fast Freddy assured Bill that he didn’t have to worry. The more the ad was repeated, the more aware customers would be of his business. It would be only a matter of time before Bill’s phone was ringing off the hook.

Week Two: Bill received only one call – and when he tried to set up a “free estimate” appointment, the customer said he would call back. Fast Freddy reminded Bill that if he wanted to be successful in business, he had to build an image. If Coca-Cola, Burger King, and all the other Fortune 500 companies spend so much on advertising just to build an image, it must be a strategy that works.

Week Three: Bill paid the fee for the first two weeks of the ad with his personal credit card, as all of his cash had vaporized. But there were no calls at all this week. And he didn’t have the money to run the advertisement again. However, he had an idea. He asked Fast Freddy if the paper could run the ad on a “CPA” (cost per action) basis. Fast Freddy was aghast, insisting that the paper couldn’t run its advertising business that way. It had to know that it was going to get paid.

The end of this story is that Bill had to let his small business fold. He went back to working for a larger company that had the capital and position in the marketplace to ensure a continuous flow of new customers.

It’s been my experience that if an ad is going to work, it works right away … period. For example, I used to market electric stun guns in martial arts magazines. The very first time I ran my ad, it sold enough product to earn a profit after paying for all of the expenses, including the cost of the ad. And it earned a profit every time I ran the same ad. But when I made the mistake of buying into the “image-building” approach with an ad promoting an automobile oil additive in local shopper publications, I continually lost money.

Yes, there are exceptions … rare instances when an image ad that didn’t work right away begins to produce after repeated insertions. But if you’re a small-businessperson with limited capital, you simply can’t afford to take that kind of risk. As acclaimed marketing guru Jay Abraham said in Message  #1486.

“‘Image’ advertising (another name for institutional advertising) seeks to create an image about your product or your company in the hope that people will remember you when they’re ready to buy. Most image ads say, in effect, ‘Buy from us. We’re wonderful.’

“As far as I’m concerned, with image advertising you have to spend a fortune over a long period of time before you get any results at all. And even then, the results are virtually impossible to measure.”

My Street-Smart Business Principle No. 1:

Always use the “Break-Even Probability Formula” when considering an advertising expenditure.

When you’re considering spending money on advertising, calculate how much of your product or service you will need to sell in order to break even, what the probability of reaching that break-even point is, and if there is a high enough profitability level.

In the example of Bill’s tile-installation business, he was a one-man shop that profited by an average of about $600 per job. That means he would’ve needed to secure two paying jobs from each of those $1,200-per-week ads just to break even.

So Bill should’ve first determined if there was a strong probability that he would make that number of sales from such an advertisement.

And there’s something else he should have considered. As a one-man shop, Bill only had enough time to complete two jobs a week. In other words, even if he did get the two jobs he needed to break even on the advertising cost, he wouldn’t be able to bring in any additional income to contribute to his overhead or living expenses.

Clearly, making this advertising expenditure was a bad idea.

In an article titled “How to Develop a Successful Advertising Campaign”, Tom Egelhoff astutely notes, “In order for advertising to be successful it must be an investment, not an expense. That simply means that advertising must produce more potential customers who buy something than the advertising costs the company. Advertising cannot create a financial drain on your business.”

As a small-businessperson, it’s critical for you to remember that the only kind of advertising you can afford to do is the kind that generates at least enough cash flow to pay for the campaign and still contribute additional profits.

My Street-Smart Business Principle No. 2:

Never risk substantial capital on untried advertising

Another way to make sure you make the best possible use of your limited advertising funds is to avoid making large expenditures on ads that you’ve never tried before. In Jay Abraham’s book Getting  Everything You Can Out of Everything You’ve Got, he wisely advises: “Never test big if you can test small.” This sounds obvious, yet too many small businesses don’t do it. As a “street-smart” small-businessperson, you need to be very cautious with your advertising dollars. If you try one large ad and it fails, it could put you out of business.

Be patient when you’re trying to grow your small business. It’s better to grow slowly but surely than take a risk on gambling it all for one big hit.

[Ed. Note: Larry Fredericks is an acclaimed entrepreneur with a history of successful business dealings in retail, direct mail, the Internet, and real estate. In addition, he is a nationally published business author and speaker who has recently released his “Street Smart” Business program.]