Tuesday, March 20, 2007
Today, if you ask any marketer what his biggest challenges are you will no doubt here Return on Investment (ROI) at the top of their list. With competitive pressures, businesses more focused on profitable growth, and an increased need to do more with less, marketing professionals need to generate favorable returns on most – if not all of their marketing campaigns.
Upon first blush, this looks rather simple. Just take the total cost of your campaign, track it through to conversion and determine that the revenue generated is greater than the expense. However, most people make the mistake of assuming that calculating ROI is only involves direct expenses and revenue. There are other factors to consider when determining your return on investment.
In a moment, I’ll show you a quick formula to help calculate ROI, but before I do, let me explain the types of expenses you need to consider:
Direct Expenses. Any cash outlay you have to develop, create, and distribute your marketing campaign is considered a direct expense. For example, if you’re doing a direct marketing campaign, you’ll have to print your mailer, pay for postage, and offer an incentive. All of these factors are direct expenses because they cost you money.
If you’re marketing online with Google Adwords or a similar type of service, you’re paying for each and every click – this is considered a direct expense.
Indirect Expenses. An indirect expense is something you spend to in conjunction with your marketing efforts but doesn’t necessarily involve a cash outlay. For example, if you pay a copywriter or designer to help with your creative, their time and expense must be considered. Other indirect expenses might include your overhead such as rent, electric, phone, insurance, etc.
Now that we’ve identified some of your expenses associated with an ROI calculation, lets look at a specific campaign example and how we can determine our return on investment in a simple manner.
Example1: MarketingScoop, LLC decides to send a post card mailing to a list of small businesses promoting their directory service listing. Here is a list of expenses associated with the mailing:
Post card design $100
1,000 post cards $200
Indirect Expenses X .25* $200
A rule of thumb you can use to calculate your indirect expenses is to multiply your direct expenses by 25%. If you want a more exact determinant of indirect expense, you will have to record the amount of time attributed to this particular marketing project as a percentage of your annual ‘available working hours’. Then, multiply this percentage against your total business expense.
Based on our calculation above, total campaign cost equals $1,000. For this example, let’s assume that the campaign brings in $2,500 in revenue. Simply divide revenue by expense ($2,500/$1,000) to determine ROI. In this example, our ROI was 2.5.
Note: This is a Gross calculation which means that we have not subtracted any product related expenses. This gets into Net Income, EBITDA, and other stuff for the accounting team to figure out.
The key is to use this information as a benchmark for future campaigns. Instead of assuming that a marketing campaign is productive, you now have a basic measurement to evaluate it and compare future campaigns.