Since the first marketing campaign, business owners have struggled with the age old question – What bottom line value did their business get from a marketing campaign? Entrepreneurs want to be sure they’re wisely investing hard earned dollars. Blindly throwing good money after bad is not a recipe for success.
Return on Investment (ROI) to the rescue!
While the term may be intimidating, the analysis is easy and practical. In fact, pbSmart™ Essentials has created a free online ROI calculator for you. This lets you focus on the business implications rather than an (eventually victorious I’m sure) tussle with your calculator. Before we head over and put it to the test, let’s cover a few of the basics.
What does ROI really tell you?
Business is about spending money to make even more money. It’s investing to make a return. ROI represents the return you make on an investment as a percentage. Let’s look at an example.
When you walk into any bank you see the current CD rates displayed. Let’s say their one year rate is 3% for a $1,000 deposit. That means at the end of one year you’ll receive $1,030 back from the bank. Your ROI is 3%. Another way to read the ROI of a bank CD; for every dollar you invest you will get $1.03 back.
Unfortunately in business the endless array of marketing options don’t come with the financial equivalent of a Nutrition Facts label. You’ll need to do your own calculations of ROI.
ROI Analysis is an easy way to objectively compare marketing campaign results.
You might be tempted to think that the campaign with the best return would be obvious. If Campaign A earns a net profit of $1,000 and Campaign B earns a net profit of $10,000, then Campaign B must be better, right?
What if you only spent $500 on Campaign A, but $14,000 on Campaign B? Suddenly Campaign B doesn’t look quite so attractive anymore. Now imagine you’ve got 10 campaigns to compare. What a headache.
ROI to the rescue. Simply open up a spreadsheet or word document and list out your 10 campaigns. Next to each one note the ROI. At a a glance you can see which marketing efforts yield the highest return, and which may need to be dropped.
What you need to calculate ROI for your marketing campaign:
- Total Mail Pieces / Emails – Number of snail mail letters, postcards, parcels or emails you will send as part of the campaign
- Campaign Budget – This should include printing costs, postage, and resources incurred only for the particular campaign to be analyzed.
- Response Rate – The percentage of recipients who respond to the campaign. If you send out 100 postcards and get two responses your response rate is 2%.
- Close Rate – The percentage of respondents who actually purchase something. (Remember the end goal is to bring in more profit.)
- Revenue Per Sale – The amount of money earned for each sale made due to this campaign.
- Gross Profit Margin – Percentage of revenue that hits your bottom line (becomes income)
Plug in the numbers and get your proposed campaign’s estimated ROI. Any negative answers should first be reviewed for data entry errors (who hasn’t accidently hit the number 2 when reaching for 1?). If there are no errors, it’s time to revisit the decision to even pursue this campaign.
Using our earlier bank CD example, imagine if the rate posted was minus 3%. The bank is saying to you, give us $1000 and in a year we’ll give you back $997. What?! If you wouldn’t do it at the bank, you shouldn’t do it with your business.
ROI – The After Party
While it’s good business to estimate the return any campaign will deliver before spending money, you still need to track the actual results. Predictions aren’t results (or Eli Manning of the NY Giants wouldn’t have two Super Bowl rings).
Review your results versus expectations. Look for ways to avoid major misses in ROI prediction. Highlight times when you spot on. ROI analysis is only as good as the information put in.
Calculating the ROI on past and future campaigns is an easy, effective tool to help you invest your marketing budget wisely. Go over and try it out the calculator. Were you surprised by the results? What changes are you considering to improve your bottom line?