Return On Investment (ROI)

• Lesson
• Exercise
• Answer

No company can hope to remain viable or even grow, without closely monitoring the effectiveness of its advertising. In the current economy no corner of a company’s expenses is going without scrutiny, especially marketing and promotion costs.

The benefits of return on investment data works both ways, it may identify lost causes per strategy or locations. Conversely, the calculation might also highlight a strategy that deserves even more financial support.

The negative results of making expenditures which do not contribute to profits are obvious. A company’s inherent marketing goal is to direct its efforts toward activities which produce a desired outcome, usually sales but could also include interim steps toward a sale, attendance at events, subscriptions, sample downloads and other such activities by its prospects.

A popular method of measuring whether a firm is getting its money’s worth from promotions is by the calculation of Return On Investment (ROI). Return on Investment is a metric that measures profit associated with each investment. Although methods and approaches may vary the calculation below will yield a basic return on investment result:

Return on Investment % = Profit – Investment / Investment (result expressed as percentage)

Data needed to calculate Return On Investment (ROI):

Annual Profits (income minus expenses)

Annual Promotion Expenditures (costs per promotion measured)

Obviously many other variables can be added to the mix to support particular promotion expenditure, but utilization of the formula above will aid in making key budget decisions within the marketing category. For example, with available data a company may be able to use the formula to compare promotion methods such as newspaper advertising, radio or direct mail. They might also be able to gather return on investment based on specific stores or even regions depending on company size.