Marketing campaigns are investments. Like any smart investment, they need to be measured, monitored and compared to other investments to ensure you’re spending your money wisely.
With a solid return on investment (ROI) calculation, you can focus on campaigns that deliver the greatest return to your business (and make you the most money). Calculating the ROI for marketing is easier than you think.
Step one: Filter out the opportunity if it doesn’t target your ideal client. If you sell wedding dresses buying a booth at a hardware show is not a good idea.
Step two: You will need to calculate your gross profit which involves some basic math with numbers from your income statement. You’ll need sales and your cost of goods(COGS).
Gross Profit = Sales – COGS
Gross profit is how much you retain after you pay for the item you sold. For example, last year you sold $1,000,000 worth of product and your COGS were $500,000.
$500,000 = $1,000,000 - $500,000
This tells you that for every dollar in sales you retain fifty percent.
One day a new salesperson talks their way into your office and pitches you an opportunity to advertise on a new TV show and promises you a huge jump in sales if you do it. Since you know that talk is cheap you do some digging on your own (asking fellow business owners, google search etc) and you estimate the ad will bring in an additional $50,000 in sales. The salesperson keeps calling and tells you since the ad will only cost $25,000 it’s a great deal and you make $25,000 for no extra effort, not so fast. Since we now know the gross profit on this opportunity is $25,000 (50% of $50,000). The best formula for calculating marketing return on investment is:
ROI Marketing = (Gross Profit – Marketing Investment)/Marketing Investment
0 = ($25,000 - $25,000)/$25,000
It turns out this marketing opportunity has no positive return (you would be better off leaving your money in your bank account collecting interest or search out some other advertising opportunities).
Using ROI helps you justify marketing investments. In tough times, companies often slash their marketing budgets, which can be a dangerous move since marketing is an investment to produce revenue. Every company and industry are different, therefore ROI isn't always this easy to calculate. If you have any questions about this or want a professional to help you give us a call.