Marketing Metrics Made Simple

Return on Investment (ROI)

Return on Investment (ROI) or Return on Marketing Investment (ROMI) equals the gain from a program minus the cost of the program, divided by the cost of the program.

ROI = (gain - cost) / cost

For example: Let's assume that you started a new (incremental) advertising program, that it cost $50,000 in its first year, that it promoted $600,000 in incremental sales during the same year, and that the gross profit from these sales was $200,000.

If you subtract your incremental advertising dollars ($50,000) from the incremental gross profit generated ($200,000), you see that you have generated $150,000 of net operating profit.

Stated differently: the effect of your advertising added $200,000 to operating profit, and the cost of your advertising subtracted $50,000 from operating profit, for a net increase of $150,000.

Your ROI is ($200,000 - $50,000) / $50,000 = 3 = 300 percent

In other words, on average, each dollar you spent on the new (incremental) program brought in three dollars of profit.

For clarity of presentation, we usually express ROI as a percentage. So, in this case, we say "300 percent" rather than "3."

Keep in mind that a "300 percent" return on investment means the company received revenues of 300 percent of its investment, plus the return of the investment itself. Therefore "300 percent" means it quadrupled its money.

Similarly, "200 percent" means it tripled its money, and "100 percent" means it doubled its money.

Why We Use Gross Profit in the Calculation

Some marketers use sales revenue to measure ROI. But it is much preferable to use gross profit (also called gross margin).

Why? Because if you use gross profit, you will be speaking the conservative language of your CEO and CFO.

Here is a detailed example:

Let's say you have invested $100,000 in a campaign and you have identified $500,000 in incremental sales that resulted from that campaign. You can prove it from the leads you have tracked. That's good.

But if you calculate ($500,000 - $100,000) / $100,000 = 4 (an ROI of 400%), you will be overstating your ROI.

You are ignoring the cost of goods sold (COGS), also called "cost of sales." As the accounting world sees it, your company's incremental gain from those sales is this:

Revenue - COGS = Gross Profit

So, to talk the language of your CEO and CFO, you need to know the gross margins on the kinds of items sold (which you can probably get from Sales or Accounting). Then, you can make a calculation like this:

Sales revenue ($500,000) minus COGS ($200,000) equals gross profit ($300,000).

Gross Profit minus the Cost of Your Campaign, all divided by the Cost of Your Campaign, equals ROI.

($300,000 - $100,000) / $100,000 = 2

The ROI is 200 percent.

So, whenever you measure ROI, inquire into the COGS. In exceptional cases, such as the sales of services that have no direct costs, you won't have to figure in any cost. Be guided by what Accounting says.

What I'm Reading...

A Leader’s Guide to Data Analytics by Author Name (@KelloggSchool) – Kellogg School
In recent years, data science has become an essential business tool. With access to incredible amounts of data—thanks to advanced computing and the “Internet of things”—companies are now able to measure every aspect of their operations in granular detail.

But many business leaders, overwhelmed by this constant blizzard of metrics, are hesitant to get involved in what they see as a technical process.

For Florian Zettelmeyer, a professor of marketing and faculty director of the program on data analytics at the Kellogg School, managers should not view analytics as something that falls beyond their purview. “The most important skills in analytics are not technical skills,” he says. “They’re thinking skills.” Managing well with analytics does not require a math genius or master of computer science; instead, it requires what Zettelmeyer calls “a working knowledge” of data science. This means being able to separate good data from bad, and knowing where precisely analytics can add value.

Image Credit: Yevgenia Nayberg

Read the article: http://insight.kellogg.northwestern.edu/article/a-leaders-guide-to-data-analytics

Why Analytics Matter

As we reach the midpoint of 2014, we are in the middle of a fundamental transformation in the way businesses view analytics. Analytics are now seen as core to a business’ growth strategy and means for measuring, implementing and sustaining success. I am extremely pleased to see this happen and that marketing analyst no longer have to fight for the value of analytics. The fact is, those who fail to invest in understanding what drives their business will find it hard to compete in a world that thrives on data. This is why analytics matters.

Analytics are now being used as the basis for new products and revenue streams. The breadth of decisions analytics support and drive is increasing every day. The next few years will drive growth for companies that utilize data, while pushing those that loathe data in data driven industries toward irrelevance.

One of the trends really picking up steam is the need to make analytics operational. As we generate more data and we discover more new insights than ever, attention is turning to how we turn those insights into action and action into value. I believe that this will be one of the biggest trends going into 2015.

I hope you’ll join us at Growth Strats LLC in the effort to continue demonstrating to Detroit and the world that analytics matter! I look forward to blogging with you! 

Germar Reed is a Partner at Growth Strats, LLC, managing the Advanced Analytics Group.