Calculating ROI

In a marketing plan the goal is to go by channel or traffic source. For instance, if you are doing PPC you will calculate ROI based that adspend. SEO, the SEO efforts (money spent) will be the costs. Do that for each channel. Your overall ROI calculations are done in a profit/loss sheet. The marketing plan though is based per channel including any expenses made to make that happen. Let's say you spend $600 getting pages made for the PPC campaign. I would include that as a PPC marketing expense.

Does that make sense?

Yea, I understand how you can break down individual channels but what I'm getting at is I assume you use gross margins which wouldn't include operating expenses to figure roi.

IMO, it could easily be argued that operating expenses need to be calculated into roi....at least once you max out current capacity. For example, if your marketing program doubles sales, you'll probably need to hire more service people, more accountants and maybe even a larger facility for more inventory.

Here is what investopedia says about ROI:

Keep in mind that the calculation for return on investment and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation.

...a marketer may compare two different products by dividing the gross profit that each product has generated by its respective marketing expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product.

Note what they say about the financial analyst. It appears from your posts you are looking at your situation from a financial analyst point of view. I don't know this for sure, but I think the about quote gives you the answer.

Good luck,

Tom

Besides the marketing costs, a business sure as hell should plan and account for the costs of increased business. Years ago United Parcel Service had a marketing plan that included cutting pricing on ground delivery packages.

They did get more business, cut into the competition's share... But, they
hurt themselves significantly by trying to do more business at the lower prices.
Wheels turning more = more revenue AND more payroll, fuel, maintenance...
Imagine what would have happened if fuel prices spiked upwards during that time period.

It always costs x to make and deliver a widget or service and provide excellent customer care and accounting and billing... And, you're right that there is a limit as to how much increased business can be handled with x amount of employees, delivery vehicles and what have you. And other factors such as vendors increasing prices, new laws, regulations, and taxes, etc.

Obviously, digital products such as website hosting, software and e-information have advantages over businesses that require more labor and equipment...

Hope that brings some clarity to the situation that caused your post.

Dan

When calculating ROI and evaluating or developing marketing plans we suggest that you keep it compartmentalized. We don't suggest you put all your eggs in one basket, so you should have a few ways of producing meaning a few investments you are expecting a return from.

If you monitor them all individually, you can clearly see where your dollars are going, and what methods are bringing in the ROI. That allows you to put more money where it's working, and re-evaluate where it's not.

You can do it any way you need to depending on the application.

If you are justifying total investment, then you would include your total costs. If you are tracking returns from a single campaign, that is all you would include.

Some people do include overhead, specific to that campaign, into the ROI. For example, you run a printing press and you have a promotion to print posters. In the process of printing 1mil posters, your machine needs maintenance. Your costs of maintenance during that print run could affect the ROI. However, the oils and materials regularly needed to operate the machine would usually not, as they are part of fixtures, facilities, and equipment. It can be confusing at times.

To be practical, you don't have to follow GAAP standards when creating reports internal to your business. So, you can calculate ROI any way you please.

Each campaign should be fully broken down and costed. For example if you are embarking on a "business networking" campaign you might need to consider...

Cost of event
travel to event
wines, coffees etc
food etc...

You may also need to take into account of your "time" too.
(and you can bet who ever is doing it - IS NOT doing it for FREE -are they?)

In terms of measuring ROI

You might want to keep an eye on...

No. Cards collected and added to your "list"
No. of new prospects / enquiries generated
No. of new customers generated
No. of referrals generated
No. of new advocates generated
(they might refer you a sale worth £40,000 4 mths later)

Then apply similar thinking in terms of costs - direct and indirect to all your different campaigns online and offline and clearly define the KPIs you're going to count and measure for demonstrating your ROI.

Far too many people don't measure or account for their "time".

The same is also true for online such as "social networking"

Hope that makes sense.


Fraser