The Economic Worth of On-Premise Signs, Part I

The value of on-premise signs is best determined by advertising criteria

The following article originally appeared in the September 1998 issue of Signs of the Times magazine.

By Dr. R. James Claus and Richard M. Bass

“Business signage has worth far beyond its cost of production and placement. This worth can be determined through empirically based research methods and appraisal practices. Once one understands the common currency used to determine the true economic worth of a particular sign or signage program, one can speak knowledgeably about its value.”

This statement is the basis for the following excerpted report. In it, two expert appraisers outline some techniques and provide some case histories, not mere theoretical treatises, for sign valuations. Dr. Claus has been widely lauded as an expert on signs as they relate to Constitutional law, appraising and societal ramifications for more than two decades. Bass, a licensed appraiser, previously authored an eye-opening article that documented how the loss of a sign directly caused the demise of a Florida retailer (see

On-premise (or place-based communication) signage is a complex phenomenon essential to the success of the $2.5 trillion (in 1996) North American retail economy. In such a consumer-oriented, highly mobile society, street-based communication (signage) plays a vital role in providing the motoring public with information it requires and covets. Business districts with appropriately placed, sized and lighted signs effectively communicate with the public and enjoy economic vitality and increased urban land values, while bolstering the local tax base.

Easily seen and read signs also promote traffic safety by enabling motorists to quickly find destinations and exit roadways in a timely fashion. In special cases, municipalities have successftilly implemented creative signage programs to renovate business districts, often in historic areas.

Conversely, and sadly, wherever signs are severely downsized, or if they lose street visibility, the affected commercial zone cannot function as intended, which leads to district flight and often, blight.

The Royal Dutch Shell case
Several years ago, the Royal Dutch Shell oil company purchased White Rose, a regional Canadian gasoline company. In the new trade area, 20% of the gas stations were owned by White Rose, and each of these had standardized corporate-logo signage.

Prior to making the purchase, Shell wanted to ascertain the value of the White Rose signage. Would Shell be better off retaining the White Rose name? Through subsequent research, Shell learned that neighborhood gas stations that switched to the Shell logo enjoyed 15% hikes in gross revenue, in contrast to those stations that retained the White Rose name. At freeway-oriented gas stations, the Shell stations achieved 30% higher revenues. Finally, although Shell only had 15% of the gas stations within the trade area, it achieved 21-23% of the area’s gasoline sales.

These figures evidenced the powerful value of Shell’s internationally recognized logo. Naturally, Shell converted all of the White Rose stations to Shell stations. The individual communities benefited with higher land values and tax revenues.

Real-estate valuations
Prior to the savings-and-loan (S&L) crisis of the late 80s, three groups of professionals could assign values to real-estate interests, even though they weren’t required to have any such specific training. They used, and sometimes abused, this power Beginning in the early 70s. These groups included:

  • Land-use planners and transportation engineers
  • Public appraisers (usually the county tax assessors)
  • Private appraisers (typically employed by various lenders)

In the wake of the S&L crisis, the federal government learned that flawed appraisals and valuations fostered loan foreclosures and S&L collapses. In 1989, the federal government responded with the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). This consumer-based legislative effort subjects the appraisal profession and financial institutions to extensive regulation regarding appraisal valuations.

Consequently, a federal Appraisal Subcommittee now oversees appraiser conduct, standing (licensure and certification) and education. Similarly, the Uniform Standards of Professional Appraisal Practice (USPAP) mandates who is qualified to appraise and stipulates what data and research methodologies must be applied to federally related assignments. Most states have adopted USPAP for their own jurisdictions. A USPAP appraiser risks both civil and criminal sanctions when failing to follow USPAP requirements. Any appraisal that doesn’t conform to USPAP is invalid.

Signs as real estate
The nexus between appraisal reform and signs becomes clear when one realizes that signs (on- and off-premise) are part of real-estate interests, and thus entitled to the accompanying “bundle of rights.” Consequently, licensed or certified appraisers should always be enlisted for expert testimony in real-estate valuation disputes.

All local-government tax bases are derived from a tax assessor’s opinion on real-estate values. So too with government takings; a private professional appraiser should provide an unbiased opinion to determine the just compensation.

A perfect example occurred in December 1997 when Hamilton County (Ohio) was tearing down a nightclub to make room for the Cincinnati Bengals’ sports stadium. Hamilton County’s tax assessor assigned a value of $1.3 million to the land and building. However, the club, Caddy’s, was ideally situated downtown next to two interstate highways, and an outdoor-advertising expert testified that the advertising value of the club’s five wall murals was $1.8 million. The jury subsequently awarded the club owner $3. 1 million in just compensation.

Signs as protected speech
Federal and state courts have always dealt with free-speech issues, but those protections weren’t extended to commercial speech until 1976 in Virginia Pharmacy v. Virginia Citizens Consumer Council Inc. Here the U.S. Supreme Court determined that a ban on pharmacy advertising deprived the public of important information. For the first time, commercial speech was viewed as having social and economic value.

Although planners and regulators often fail to understand signs’ myriad functions, federal court cases since Virginia have mandated that signs are like other communication media (magazine, newspaper, radio and television) and are subject to First Amendment protection. (U.S. advertising and marketing constitute roughly a $250 billion market.) This protection, at the very minimum, guarantees time, place, manner and, perhaps least understood, content neutrality. Numerous cases have upheld this, including Linmark, Central Hudson and Metromedia.

Whenever a federal regulatory body restricts commercial communication (including signage), this form of censorship may have an actionable adverse impact on a basic civil right. In order to skirt these protections, attempts are sometimes made to categorize signs as “indexes” or “street graphics,” somehow intimating that they have less value. This also mistakenly paves the way for personal bias to overshadow empirical data.

The economic worth of a sign almost totally depends on its ability to “speak” effectively to its marketplace. It’s not the time and materials cost associated with fabrication and installation. In other words, the exact-same Caddy’s signs would have been of negligible value tucked away in an alley. Because signs are a form of advertising, the best way to evaluate their value is in advertising terms. The four effectiveness measures are:  reach, frequency, readership and cost per thousand.

Commercial-speech evaluation
Reach. This measurement addresses the type of consumer exposed to the message. A newspaper advertiser obtains demographics of the newspaper’s subscribers. With signs, however, the “subscribers” are motorists and their passengers, and traffic counts on individual roads are calculated by such groups as the Traffic Audit Bureau. Traffic counts were used to calculate the advertising value of the Caddy’s signs.

As for on-premise signs, Dept. of Motor Vehicle (DMV) records can be used to create a dot map that shows the source of daily vehicular traffic, with origin-to-destination data. These maps and DMV records also can greatly define a commercial trade area.

Frequency. This factor concerns how many times someone is exposed to the same message. For signs, origin/destination information is critical. Motorists just passing through a locale will only see a sign once. Others may see it twice every weekday going to and from work. Traffic-count figures are adjusted for infrequent motorists based on time-tested formulae. Also, some motorists who see the sign are not potential customers for the product or service, and these people are known as “waste” factors.

Readership. This criterion focuses on a message’s effectiveness to the individual recipient. The most commonly used tools are recall and recognition tests. Rating services provide these tests and results for all major media; Nielsen provides television ratings, for example. Small-business owners rarely have access to such information, unless they are part of a franchise. They may be forced to find a local researcher to do such a study.

Cost per 1,000 exposures (CPM). This is the one common measurement for all commercial communication media: broadcast, publications, direct mail, billboards and on-premise signage. These numbers are obtained by taking the frequency data and dividing the cost by the number of exposures during a defined time period. The three following examples, although not typical, include data taken from a single court case:

  • Television – Within a trade area of 80,000 households, an estimated 15% (12,000) watch a particular 30-second spot at 9 p.m. on a weeknight. At an estimated cost of $1,200, the cost per 1,000 exposures (based on 12,000) is $100.
  • Newspaper – This is much easier to cost out because of the known quantity of readers. In this same urban area of 80,000 households, with 40,000 newspaper readers, a Sunday ad costs 40 cents per line. A 3-by-7-inch ad would include approximately 300 lines. At a cost of $120, and with more than triple the reach of television, the cost per thousand drops to $3.
  • Signage – This is a more difficult evaluation because it’s based on original costs, plus maintenance costs and depreciation. This case involved a $10,000 double-face sign. It has an amortization period of five years at 10%. The cost per month then becomes $212.47. With adjustments, a traffic count of 30,000 cars per day becomes 900,000 exposures per month, which then becomes a seductive 24 cents per 1,000 exposures.

For on-premise signage’s cost-per-thousand, it’s best to borrow the figures used by the outdoor-advertising industry. Based on these figures, it becomes clear how cost prohibitive it is to replace the exposures that a business would lose if its sign’s effectiveness vanished. (For an excellent case history about a Best Buy grand opening, see For this reason, amortization (based solely on design, fabrication, installation and maintenance costs) masquerading as just compensation for retroactive restrictive regulations is perversely damaging both to the business community and the local tax base.

Recall and recognition
These two factors in advertising effectiveness were briefly mentioned above as part of “readership” measurements.

Recall tests measure how well recipients remember a commercial message, either unaidcd, partially aided or completely aided. A message that retains strong, unaided recall after 48 hours is considered very effective. Weak recall means very limited or no success.

Recognition tests evaluate people’s memories before and after ad campaigns. These are particularly useful in political campaigns to measure “face” recognition. Many other factors surface in such measurements, but are less important for this discussion. (A telling report on the subject is “The Appraisal of Roadside Advertising Signs,” which was conducted by Donald Suite, Jr. in 1972 on behalf of the National Assn. of Real Estate Boards.)

Each of these reflects a basic advertising goal: top-of-the-mind awareness. Many retailers believe that “share of mind” equals “share of market” – i.e., what brand do you think of first when we say “hot dogs.” The first brand thought of most probably has the biggest market share, but there are exceptions.

Recent recall studies about brands of cars indicate people will say “General Motors” approximately 30% of the time. This has declined by 22% since 1977. However, this doesn’t mean that GM is selling fewer cars. To the contrary, the market has expanded so much in the past 20 years, GM is actually selling more cars. It’s just that the company’s market share has decreased. (Consequently, GM is reassessing its commercial communication expenditures.)

Market-share studies
The outdoor-advertising (billboard) industry conducts some of the best recall/recognition studies. Naturally, bigger signs on busier roads attract more attention than smaller signs set back away from less-traveled thoroughfares. A full-size (30-sheet) billboard can boast four times the exposure of a smaller poster. Consequently, a 720-square-foot bulletin may command $3,500/month while a 320-square-foot poster might sell for only $750/month. Other types of out-of-home advertising – kiosks, bus shelters, transit advertising – may sell for $500/month.

These same factors hold true for on-premise signs, although they are not sold based on traffic counts. At least 50% of U.S. business involves products and services provided by franchisers. Extreme care is taken by these franchises to have uniform looks to their on-premise signage.

Sometimes this carries over to uniform architecture, playgrounds, etc. Indeed, the major benefit of owning a franchise outlet is buying into the goodwill that the franchise connotes.

These accouterments, sometimes called signature improvements, provide instant recognition to the potential customer when used effectively. By instantly triggering responses, on-premise signage not only signals the presence of a business, but the brand of the available product or service.

Nothing in the continuum of advertising/marketing is unimportant. Direct-mail campaigns, print ads and broadcast commercials are all critical components of brand awareness, but if there is no effective on-premise sign that indicates where to purchase the product or service, all is for naught. Together, these advertising products provide the framework for the most successful economy and highest standard of living in recorded history.

Ads as derived demand
Commercial communication is central to market share within a particular category. Communication does not, however, control overall market volume. A common fallacy credits advertising with increasing consumption across the board. Consumption remains relatively static, fluctuating primarily with income or population changes.

In a competitive, economic system such as in the United States, market share fluctuates to a great extent based on the effectiveness of the corresponding advertising/marketing program and access to commercial communication.

In all supply/demand market dynamics, advertising represents a derived demand, based upon expected short-run consumption of goods and services by a defined population. Market demand is determined by consumer profiles. Generally, demand and profiles remain relatively constant. Even if a shift occurs, a decline in one market is often offset by an increase in another market. Gross sales remain virtually the same. The fast-food industry exemplifies derived demand. This mature market has predictable consumption patterns; for example, in 1995, the average American spent S12.50 per week on fast food. A retailer such as Burger King (with 7100 stores that generate $6.7 billion in sales) can increase market share through changes in population or per-capita spending. However, if neither of those factors changes, then it can only increase market share by taking business away from a competitor.

For example, even though fast-food sales increase 3.5% annually, McDonald’s spends S500 million on U.S. advertising ($40,000 per site) just to maintain a competitive edge.

Home Depot, a “killer” retailer, also illustrates derived demand. In 1994, Home Depot’s 290 stores absorbed approximately 7% of the $55 billion home-improvement market. Although the company expects to add 50 stores by 2,000, the increased sales must come from competitors unless market demand grows.

If sign size is severely restricted, the retail playing field becomes decidedly uneven. Franchises enjoy a huge advantage over independent retailers, just as they do in highway-logo programs. Franchises with major-media ad campaigns are doubly blessed.

Whether intentional or not, size and copy restrictions in a “fixed-demand” economy – ostensibly under the guise of equality – do exactly the opposite.

Wade Swormstedt

Wade Swormstedt

Wade is Executive Director of the Foundation for the Advancement of the Sign Industry. Formerly he was Editor and Publisher of Signs of the Times magazine.

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