Albert Einstein once said “everything should be made as simple as possible – but not simpler”. In this same manner, it’s important to distill down all of the features of successfully building, buying and operating billboard signs to their most simple components. That’s the focus of this Billboard Mastery podcast. It took a lot of hard work to come up with these simple formulas.
Episode 22: Albert Einstein Was Right Transcript
Albert Einstein once said, "Everything should be made as simple as possible, but not simpler." This is Frank Rolfe, the Billboard Mastery Podcast. We're going to talk about how to derive simple formulas for the creation of billboard investments and their management. As you'll find out, there are a lot of simple formulas floating around out there that are very, very useful. Just simple enough to be easy to remember and understand, but not so simple that they really don't give any great meaning.
Let's start off with the first one I'd like to talk about which is setting a budget for when you build or buy a billboard. I've learned over the years that the essential formula, the simple formula, for pricing what you should spend on a sign is 5X net operating income. Now, that's based on an annual revenue minus expenses. So what you do is you figure out what the sign will rent for, then you take away the expenses such as the ground rent, insurance, the cost of installing the advertisement, the electricity. And the final net number times 12, so annual, times 5. That's pretty much your budget.
So let's just create for a moment that formula, that structure, in reality. Let's assume you've got a sign. It's a metal sign that you want to build, and the sign will rent for $1,000 per month per side. So you have $2,000 a month of revenue. Let's assume your operating expenses are roughly about 40% on this particular sign between ground rent, electricity, insurance, repair and maintenance, taxes, all those items together. So every month I'm netting effectively $1,200. That's 60% of $2,000 of total revenue, times 12 is $14,400. Then multiply that times 5 and what do you get? You get about $70,000. That's how much I can spend on that sign and fall under that 5X net income formula.
Now what's so important about that formula? Why would 5X that number matter? Well here's the deal. If you're going to go out and borrow money to build that sign, which you will, you've got to make sure you can pay that loan off and still have plenty of time on that initial lease term to make a profit. Because the second leg of that term, the second renewal of that lease, that's typically where you make all of your profit. So if I go with a 5X multiple I'm typically going to pay that note off in about a 7 year mortgage. Now since most billboards have at least a 10 year minimum first term, that means I'll be able to pay off that sign and have roughly three years of profitability before the lease ends the first period. The second period will be all profit.
Now let's look for a moment if I change that formula. If I change that formula to for example a 10X number I won't be able to pay that sign off probably within 15 or even 20 years. Therefore, the sign has no profitability at all. So I won't have the note paid off within the end of let's say the first 10 year term. I may not even have the sign paid off at the end of the second 10 year term. So what am I even accomplishing there? Good question. When people want to start paying multiples of 10X net income, let them but don't get involved in that. That's typically a sign that the market is at its peak and will no doubt fall in the future.
Another simple formula is the 500 ft. clear read formula. Let's assume that you're looking at a billboard. You're trying to figure out whether the sign has freedom from blockage enough to be of value to an advertiser. The simple formula to that is one click of your odometer, which is approximately 500 ft., from when you can first see the sign free of obstruction to when you can no longer see the sign at all. Now why is that an important formula? Well, here's the deal. Typically you can't see the words on the sign effectively until you're within about 500 ft. So secondly, if you have used not a whole lot of words on the sign, typically around 10 or fewer, you should be able to read that sign also within that 500 ft. window.
So when people look at signs, let's assume you've got a sign and it has got a tree obstruction, a building, something else that blocks you from being able to read the ad, what's critical is when you come free of those issues, free of the tree, free of the other sign, free of the building, do I have at least one click of my odometer before that sign disappears out the top of my car window where I can no longer read it? If the answer is yes, I can read the sign for 500 ft, then that read would be considered just fine. Now of course it would be great to have signs that you can read from 2,000 ft. away, but if you really note those signs you see from 2,000 ft. distance, you'll notice you can't really see the ad, you can't read the ad. So really that 500 ft. window of visibility, that is in fact what is key.
Finally, let's talk for a moment about advertisers and the necessity to be able to use the two most important words in the English language for an advertiser on a billboard, and that's "Exit Now." Why is "Exit Now" so important? Well, here's the deal. Billboards have one power over radio and newspaper and magazines, and that's none of those can time the exact moment that you see the McDonald's ad for the 99 cent meal plan at the very moment you're passing the McDonald's, only the billboard can. So that point of purchase, that strength, is what is exemplified when you are able to say "Exit Now" because you're not only being able to advertise a product, you're able to say, "And if you want that product it's time to exit." Now, whenever I look at the longevity of an advertiser, one that will stay on the sign year after year, nearly perpetual renewal, they always seem to have that attribute of being "Exit Now." So when you're making a short list of advertisers to really press to get signed up on your sign, "Exit Now" is vital.
In fact, Harvard in their marketing book back in the 70s and the 80s wrote that the most powerful thing you can put on a billboard is in fact "Exit Now." Since we know "Exit Now" is so strong, you should seek out those advertisers at that next exit down from the sign, or maybe the next two or three exit down. If you can't say "Exit Now" you can at least say "Next Exit" or the exit number that's coming up shortly. But always look for those advertisers. If you can get one of them on the sign, you may have a lifetime advertiser on your hand. That's not to say there are not other advertisers for billboards. There definitely are at least 10 different methods it can be used to find a suitable advertiser for any sign. However, the best, the strongest of those, the ones who are willing to pay and those who get enough benefit from the sign they feel it's an investment so they renew consistently, are always those that can simply say "Exit Now."
Again, there's many, many different simple formulas in the billboard industry. Those are three of my favorites, but there are still more. I think it's always important to try and distill information down to those simple formulas. I think that Albert Einstein was in fact exactly correct, that any time we can take information and make it the simplest, therefore it becomes the strongest and the most successful for us. This is Frank Rolfe for the Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.