Calculating ROI – A Must For Any Marketing Budget

Posted in Marketing

Every business, big or small, that is using advertising to increase their customers’ revenue and brand awareness needs to know how to track the effectiveness of their advertising. Without some kind of measurement, there is no way to determine which marketing avenues are working the best and where your money is best spent. Learning to calculate return on investment (ROI) on your marketing dollars can be an eye-opener on what is really producing results, or not, in your marketing plan.

When asked about their marketing campaigns, most businesses would say that they are tracking their results and know what is working. But many businesses do not truly know how their strategies are actually performing based on dollars and cents. They may be tracking lead calls or coupons that come through the register.  Yet if asked for a dollar amount or ROI percentage on that marketing, they would not be able to answer.

Tracking Lead Generation vs. Tracking Revenue Generation

Here is the difference. Let’s say a restaurant is using two venues to distribute coupons to the consumers in the area and both are delivering to the same amount coupons with the same offers. At the end of the month, one method has produced 100 coupons and the 2nd only 75. Without ROI calculation, it would seem the 1st option is outperforming the 2nd option.

Now let’s do a calculation. To keep it simple, let’s say both venues cost \$500. But for more accurate numbers, we will take into account the total ticket sale for each coupon. For venue #1, the total sales generated by the 100 coupons is \$2000, an average of \$20 per coupon. For venue #2, the total sale is \$2100, an average of \$28 per coupon. Obviously, #2 is bringing a higher quality consumer that spends more. So even though #2 had less coupons turned in, it was a higher ROI.

The Marketing ROI Formula

Percentage ROI is calculated by dividing the revenue generated minus the cost of goods sold (CGS) by the cost of advertising: (Revenue-CGS)/Advertising cost=ROI.

In our restaurant example, let’s say the cost of food averages 30%. So in the example above, ROI on #1 would be [2000-(2000 x .30)]/500 =2.8 and #2 would be [2100-(2100 x .30)]=2.94. For marketing, we would want this expressed as a percentage, so the end result would be multiplied by 100, giving us 280% and 294% ROI. This is the percent of return on the advertisement dollars invested.

There are differences in this calculation depending on industry and what each business wants to track. For instance, some calculations factor in the value of a customer, lifetime or yearly. Some businesses include certain operating expenses into the CGS. But for our purposes, we only subtracted the actual cost of goods sold. It can be argued that operating expenses are incurred whether or not you advertise, so it should not be a part of the equation. The above equation is a simple version and if you are not tracking ROI now, it will help you get started.

You Need to Know the Numbers in Order to Do the Math

The main point here is that when you are looking at where to invest your marketing budget, you need to know exactly how your marketing efforts are performing. It is the same as investing in stocks or CDs; it all comes down to simple math. But for the math to work, you must be effectively tracking your results. This means tracking all leads and customer response vehicles like coupons, not just the number that call or come in but also the actual revenue generated. Once you have that number, you can plug it into the formula and have results based on the true revenue you received. As with most aspects of business, knowledge is the key to your success!

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