When used to determine viability of an expense or activity, ROI can be as valuable as a crystal ball.
Return on Investment or ROI is an often-used term in marketing analysis. Basically, it is a key performance indicator to project and determine the profitability of an expense or marketing activity. Most important is its ability to project the viability of a marketing venture before having to spend a penny!
Calculating ROI is straightforward. You look at the gains after the activity minus the cost of the activity and divide by its cost to get your ROI percentage. If you made $5,000 on the marketing promotion and it cost $1,000 to implement the promotion, take $4,000 and divide by 1,000 to see that your ROI was 4 times your investment.
A Bit More Complicated
However, there are other factors that must be taken into consideration. If you are promoting a product, you need to calculate the cost of goods. The cost of shipping also needs to be considered. Other factors may be less obvious, such as the time and/or cost of additional staff or training needed. You’ll want to expand your math calculation to projected revenue (-) cost of goods, (-) cost of the promotion (design/printing), cost of time/staff, (-) cost of shipping/mailing. The resulting number gives you a better idea of what the marketing activity “contributed” to your bottom line.
Projected Revenue
Project revenue is the amount of sales based on experience: the number (quantity) of sales that may result from the promotion multiplied by the potential average sale. If you think that the promotion will result in 500 sales at an average of $25 per order, the projected revenue is $12,500. It is from this number that the expense numbers are subtracted.
Using ROI
Before forging ahead with a good idea for a marketing promotion, it is prudent to go through the exercise of projecting ROI and discussing whether the resulting numbers are worthy of the time and effort. If the above projection of $12,500 has a total of expenses equaling $7,000, it is wise to discuss whether the contribution of $5,500 is enough to warrant the work involved. This analysis is also a steppingstone for discussion. Are the projected sales numbers reasonable? Can we reduce the expenses by changing direction or seeking other vendors?
Once you have decided to go forward with a marketing activity, you need to do a comparative analysis on the back end to see how the final numbers parallel the projections. Were you too conservative or bullish in your sales projections? Were costs in line with estimates?
Valuable Insight
When you measure your marketing ROI you learn valuable data that can be used to design future marketing activities:
- Where to spend your money.If a promotion isn’t as successful as you had hoped, you can allocate your funds to other, more successful marketing activities.
- Whether to change strategy.Your promotion may have been designed to gain new customers, but investment may be better utilized in introducing existing customers to new product lines or achieving a higher average order.
- Which marketing tools to use.You may learn insight about customer behavior and adjust future marketing accordingly. If print isn’t working as well as social media, you know where to focus your attentions in the next promotion.
Keep in mind that not all marketing promotions have a goal of increased revenue. Some are designed to introduce the company’s brand to a new vertical market and need time to build a relationship with a new audience. Some activities merely want to boost social media following.
The issue is that without calculating ROI, you cannot be sure that your efforts are yielding results and you will not be able to maximize your profits. ROI is key to growing a successful business.
If you have questions about projecting and calculating ROI for any marketing promotion, call Noel at 978-505-2783 or send an email. We’ll be happy to help!