Return on Investment FormulaHow can I use a Return on Investment Formula for Marketing?
The Return on Investment Formula can be found at these links. It is basically the (Returns ÷Investment -1) * 100%. The same formula is used for any type of business investment. It helps to determine whether an investment will generate an expected return at some point in the future that will be greater than the investment. If the investment is greater than the returns the company will lose money and shouldn’t make this particular investment. If the returns are greater than the investment, the company should make the investment.
Using the Return on Investment Formula for marketing
Using the Return on Investment Formula for marketing has some very specific issues that need to be addressed. On the returns side of the equation, the marketer needs to calculate the expected unit volumes to be generated from the marketing activity and then multiply that unit volume times the margin per unit. This then provides the incremental returns measured as profit margin that can be attributed to a specific marketing investment. If for example an investment is estimated to generate an incremental unit volume of 1,000 units, each delivering $5.00 in profit, then the returns are $5.00 * 1,000 = $5,000. If the investment to deliver this incremental profit was $2,500 then the Return on Investment Formula would mean that the ROI for this investment is 100%.
Using the Return on Investment Formula for Pricing
A more difficult challenge is to calculate the Return on Investment formula for a new price change. The return from a new price can be calculated by determining the difference in unit volume, multiplied times the new profit margin. In order to determine the net returns, we need to look at the expected volume at the new price and determine the net increase/decrease in margins at the new price versus the old price. So, if a current price will lead to sales of 1,000 units at a standard price of $5.00 and margin of $2.00 that means that the current price delivers $2,000 of margin. If a price of $5.50 yields a margin of $2.50 but a volume of only 900, then the returns at the new price are $2,250. This yields a net return on of $250. But what is the investment that can be plugged into the Return on Investment Formula? Sometimes there is a cost associated with a price change, sometimes there isn’t. If it costs $100 to inform customers and retailers of the new price, then the investment would be $100 and the ROI would be 150%. In summation, the Return on Investment Formula can be used in marketing to support many marketing decisions. typically it is used for media, but can also be used for pricing, distribution and product investment decisions as well.
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