Return On Investment (ROI)

• Lesson
• Exercise
• Answer

Alexandra Cavanaugh, founder and CEO of Alexandra Cavanaugh Apparel is the creative genius behind a popular line of a line of pre-teen apparel and accessories such as t-shirts, sweatshirts and jeans using fabrics that are comfortable and stylish. The firm was launched three year ago and makes profit by selling to major fashion brands. However the business always had it eye on establishing its own brand and opening its own retail outlets.

(4) Based upon the available financial data, what is the ROI for Alexandra Cavanaugh’s direct mail campaign?

• (a) 241
• (b) 1st percent
• (c) 19th Quartile
• (d) 19%

The company finds itself at a fork in the road where it must ratchet up sales to continue its ambitious goals or cut costs to insure survival. Recently the firm opened four retail outlets as a part of its own-brand expansion plans. The company budgeted a substantial amount to promote the new outlets and its products. The investments were made before the recent economic downturn and are now getting a close review.

The CEO is particularly focused on the firm’s expenditure in the direct marketing category. Since data on its target market show a propensity for shopping via the internet and its website produces a steady stream of subscribers – the CEO is skeptical of continued investments in direct marketing. She has challenged the marketing team to produce Return On Investment (ROI) data on direct marketing promotions. Below are data available for calculation:

Annual Profits: $103,000

Annual Direct Mail Investment: $5,150

Answer the following questions to demonstrate an understanding of Return On Investment (ROI) and how it is applies to Alexandra Cavanaugh:

(1) Why should Alexandra Cavanaugh Apparel be interested in determining whether its promotions are reaping the rewards desired?

• (a) Because such data goes into tax preparation
• (b) Because the information may support last years personnel decisions
• (c) Because attendance at the company picnic is down
• (d) Because it desires that company expenditures contribute to profits

(2) How is the ROI calculation result expressed?

• (a) Number of units sold
• (b) Contribution margin per unit
• (c) A percentage
• (d) Variable costs per percentage
• (e) All of the above

(3) In addition to scrutinizing the ROI for its direct marketing campaign what other aspects of its advertising could be reviewed?

• (a) Newspaper display ads
• (b) Radio commercials
• (c) Website catalog
• (d) All of the above