Calculate Return on InvestmentDiscovering if your investment is a success or bust!
This ‘Calculate Return on Investment‘ question comes up often as marketers face tough questions from the C-Suite on how they’re marketing is helping to deliver on corporate objectives of sales and profits.
There are many ways to determine whether one investment is better than another. Some of these include: ROMI, Internal Rate of Return (IRR), Payback Rate, Return on Investment and Net Present Value. Each of these have advantages and disadvantages and can answer specific business questions depending on how they are used.
Return on Marketing Investment
Return on Marketing Investment, or ROMI, was made popular based on several books including Return on Marketing Investment. It offers a very simple way to determine the relative effectiveness of alternative marketing investments and is calculated by simply calculating a ROMI index equal to the Returns divided by the Investment. With this in place for all media activities, the marketer can quickly determine which media is more effective than others. This is the most popular method of determining media effectiveness.
Using Return on Investment in Marketing
Most marketers know how to calculate Return on Investment for Marketing. Generally it is (Returns ÷Investment -1) * 100%. This is used in marketing, but ROMI is probably the most popular. This method is probably the second most popular method to calculate Return on Investment for Marketing.
Net Present Value
Net Present Value is the best way to determine the relative value of different investments based on the cost of capital and the time it takes to receive the returns. If a marketing investment generates returns over many years and there are a number of alternatives, then this method can be used to determine the best marketing investment. This methodology typically only applies to investments from companies that have long one-to-one relationships with their customers. It could be in financial services, utilities, and others. This method is otherwise rarely used.
This method has many logical drawbacks but does provide a simple gauge as to when an investment starts to generate positive cash flow. It basically looks at how long it takes for the returns to be generated to payback the initial investment. This method is almost never used in marketing.
Internal Rate of Return for marketing
Internal rate of return is no longer used very much to determine the relative value of alternative investments. It is calculated by determining the equivalent interest rate on an investment over time that would deliver the same overall returns due to an investment. This is almost never used in marketing. The most popular methods of determining marketing effectiveness are ROMI and Return on Investment. If you have any questions on how to calculate Return on Investment in marketing, please feel free to contact us.
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