Focus: Marketing ROI
1. Calculating a Return on Investment on all of your marketing promotions allows your marketing and financial departments to review the effectiveness of the marketing programs comparatively. ROI calculations can be done at different times in the cycle of your marketing promotions so review the ROI periodically and at the end of each program.
In the simplest terms, return on investment is calculated as:
ROI=[ (Payback-Investment)/Investment] x 100
2. Get agreement on how the “payback/profit” is calculated. If you are measuring the effectiveness of all marketing programs then you want to compare “apples to apples”. Determine if you are going to use gross profit or EBITDA.
3. Get agreement on how the “investment/costs” are calculated. Are you going to use direct costs of the program? Are you going to include a percentage of overhead?
4. So let’s do a simple calculation of Marketing ROI for a Direct Mail program:
# pieces mailed=10,000
Total program costs (direct only)= $5,000
Response Rate= 5%
Conversion Rate=25%
Profit per sale (gross profit)=$100
# Responders=500
# Buyers=125
Total profit (gross)=$12,500
Marketing ROI is 150%= [($12500-$5000)]/$5000 x 100
So simply put, you spent $5000 and received $12,500 in gross profit, a net of $7,500.
5. Don’t overburden your marketing programs with all company overhead costs or you will end up doing nothing.