How to Calculate your Marketing ROI
“The real test of good promotion is: Are you getting an effective exchange? The exchange may be communication, it may be goodwill, but – are you getting exchange?” L. Ron Hubbard
When starting a new marketing venture or evaluating an existing one, the first thing you want to do is to calculate the cost. You would want to do this for each individual marketing action or promotional item.
This is a simple example of calculating your Return on Investment, or “ROI.”
Cost of designing, printing, mailing lists, postage, etc.: $8,500
Return from existing and new customers: $25,000
The $25,000 can come from 1000 new customers who all bought $25 worth of products, or from 100 new customers who bought $250 worth of products. Of course you want as many people as possible to respond to your promotion, but in ROI, the volume does not matter, the return does!
In other words, the above example was a sound investment and should be continued.
You would want to add the cost of personnel answering the phones for incoming calls, some overhead of your office, etc., as these things ensure you are there in the first place to respond and produce the desired product.
Your marketing costs may include printing and mailing, media costs, internet costs (website hosting, etc.), any marketing contracts you have, taxes, etc.
You may already see that some marketing ventures are much more expensive than others, for example, internet is cheap but less targeted than the more expensive mailings.
If you look at this flowchart, you calculate your return in: 1) what are you getting back in terms of money for your ongoing marketing actions, and 2) what do you need to get back to make your marketing campaigns profitable.
If 1) and 2) differ significantly, it’s time to upgrade your marketing campaigns to increase your ROI.
If you have been tracking your individual promotional actions, you can do the above calculations for each promotional item. If not, don’t worry, the overall cost accounting as given here will give you enough information about your marketing efforts.
With the costs and returns established, you can now set a goal for your ROI and a floor for your costs.
Within these parameters, you can now work out a marketing budget. Here are some examples.
In reviewing the marketing campaign of Company X, we find the following: A postcard mailing in January was $6,500
A mailer in February was $750
A newspaper ad in March was $540
And a series of radio announcements in April was $1000
In total, Company X spent $8,790 on its promotion over 4 months. Now, let’s see what they got back.
The postcard mailing in January returned $2,000 The mailer in February returned $1,000
The newspaper ad in March returned $150
The series of radio announcements in April returned $1.500. In total, Company X received $4,650 from their promotion.
Alright, that doesn’t look very good. But before we throw out the babies with the bath water, let’s analyze this for a second:
The postcard was a flop and lost money. The mailer earned in ROI – so that worked.
The newspaper ad was a bust but the radio announcement returned money, so that worked as well.
Now, learning from this, Company X should pour the coals on the mailer and radio announcement, and rework the post card and newspaper ad to increase returns.
In the previous example, we looked at what Company X was spending and what they got back in return.
But obviously this isn’t all of the equation.
The key factor is: “What do you NEED to get back to operate and expand your business.”
Now we see that the order of magnitude is very different: Instead of a few thousands, Company X will need returns in the order of twenty thousand!
Doing this calculation also shows something else: One mailer or one postcard per month is not going to get Company X the return they need.
So we’ll have to switch gears and think in terms of a Marketing CAMPAIGN, rather than individual promotional actions.
So, here’s an example of what Company X should be doing as a Marketing CAMPAIGN to get the ROI it will need – just in the month of January alone:
- In terms of promotion, they would send out a post card, email and newsletter,
- They would place new articles and offers on their website,
- They would, concurrently, engage in incentives, games, an open house and community activities to keep creating want and goodwill for their products. Such actions are usually very cheap but at the same time very rewarding!
With these actions in place and rolling throughout the month, the total cost is projected at $9,080 but Company X stands to gain $25,000 from this campaign – exactly what they will need for January!
So, whatever your marketing endeavors are, without these calculations of costs and returns you may find yourself open for some real nasty surprises.
One hour spent on the drawing table to measure your ROI is worth the effort. Use your calculations to continually improve your campaigns, test new ways to increase your ROI and spend your money on campaigns that produce the greatest return for your business.
In part 6 of this series we will go over market research. Stay tuned…