Tips and articles
Use return on investment (ROI) for quantifying marketing results
by Alan Hutchinson, CEO and Founder, MarketWare Technologies
There
are the Fortune 1000 and then there are the rest of us, the fortune 1,000,000
that run companies and businesses that have sales between $100,000 and
$100 million. We do not have an endless stream of money for television
advertising to establish a brand marketing strategy. We are not IBM or
Proctor and Gamble. Our budgets are modest. We need to produce measurable
results for any business expenditure including investments in marketing
programs. A marketing program can be direct mail, a trade show, a print
advertisement or a series of advertisements. We need our marketing programs
to provide quantifiable results.
What are quantifiable results? Return on Investment (ROI) is a term used most often with investing money. We invest 100 dollars in stock and we would be happy with a 15% ROI. Or we invest 1000 dollars in direct mail and we would like a 50% ROI. To calculate ROI you must know the formula, and you should have data that supports the formula values. This brings us to the two steps for calculating ROI.
First, you must track results
Many marketers spend time and money putting together marketing programs, but do not have a way to track results and close the loop on the marketing process. This involves getting sales to cooperate with marketing. The sales and marketing departments need to work together to make this happen.
A common example of tracking results is coding ads and direct mail pieces. A code could be as simple as an 800 number with a specific extension number that is only printed on the direct mail piece or in the advertising. The company will know by the phone number that the call was the result of an ad in the Wall Street Journal. This is the first step in closing the loop.
Next, you need to grade the responses. We all know that every call from an advertisement is not a qualified sales lead. A sales lead should be defined before you start the process. Your sales people or telemarketing inbound department should grade the response as a sales lead or as an inquiry. It either is a sales lead or it is not. Any personal information manager like Act® or Goldmine® can be set up to track this type of information. These software packages are readily available in stores for a nominal cost and already are on many salespeople’s laptops and desktops.
But software is only as good as the people using it. To gain cooperation from salespeople, you have to know what motivates them. Winning motivates salespeople! It’s as simple as that. They call on accounts where they can win the business. In other words, if you feed salespeople responses not leads, they will put your program in the bottom drawer. A response is not a lead. However, if you feed salespeople good leads they will cooperate and help you track results. They will want you to succeed with your marketing program. If you succeed they will succeed. It is important to note that you may not bring them good leads all the time, but as marketers, we have to own up to that responsibility. If your program fails, you must admit that to the salespeople to keep their respect and ask for their input on the next program.
The last action in closing the loop is counting the sales made from the sales leads. If you can count sales, you can track ROI.
Second, define the results and put them into the formula
You now have the number of sales that your salespeople made and, as a result, the average price per sale. The average price per sale will allow you to convert your sales numbers into sales volume. The two other variables you will need are the total cost of the marketing program and the gross profit on sales. As a side note, your total cost divided by the gross profit percentage will give you the break even in sales revenue you will need to make your investment back. You do not need the salespeople to help you with this figure. This should be known before you launch the program.
Doing the calculations
Now you are ready to calculate ROI as follows:
Sales Volume=Number of Sales x Average Price Per Sale
Total Gross Profit=Sales Volume x Gross Profit Margin
ROI=Total Gross Profit/Total Cost of your Marketing Program –1
You have done it, you calculated ROI on your marketing program. What if your program ran a negative ROI? Then your program failed. But if your objective was increasing awareness, then it may have been successful. It is important to define your goals in advance. Measuring intangibles like brand identity and awareness are a little squishy when considering ROI. This is a topic for another column.
In conclusion, if you want quantifiable results, think realistically about results. Ask salespeople about the ratios they use like close ratios and sales lead ratios. If you know that for every 1000 responses to an ad you get 100 sales leads then ask the salespeople their close ratio. If it’s 10%, then you made 10 sales. What is the average price per sale? What is the price? What is your budgeted cost for the program? Can I lower costs? Can I increase responses by mailing more pieces? What are the profits? Will an incentive increase responses? How does that effect my cost? Don’t throw your money away without testing or doing what if scenarios. You need to what if for a while before spending the first $1.
Define your objective, budget your costs, define ratios, gain the sales department’s cooperation, and what if it to death. If you are comfortable with your what ifs, then launch your program. Then close the loop, measure results against your what ifs. You then have a history of what works and what does not work. You will become a better marketer and you will achieve better ROI for your marketing programs.
About the author
Alan Hutchinson is CEO and founder of MarketWare Technologies, Inc., a developer of marketing analysis software, including ROIit!(tm), a new product for analyzing return on investment. Previously, Alan held marketing and sales related positions at Hyatt Hotels Corporation and Marriott Hotels Corporation.
GoldMine is a registered trademark of Front Range Solutions USA.
ACT! is a registered trademark of Sage Software, Inc..
May 1998
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