ROI FormulaThe ROI Formula for Marketing!
The ROI Formula for Marketing
The ROI Formula for marketing doesn’t differ from other ROI Formulas used in business.
ROI only ever stands for Return on Investment. In marketing this is often referred to as Marketing ROI or ROMI for Return on Marketing Investment. The primary difference between the ROI formula for marketing and for the rest of business is in the accuracy of the two key variables: R for Return and I for Investment.
‘I’ is for Investment
This is generally measured most as direct costs. By ‘direct costs’ we mean the actual advertising impressions purchased whether digital or traditional media impressions – they all count as do the investment made in each.
For example, if a sponsored ad click-thru costs $3 per click then 1,000 click-thru’s cost $3,000. The total direct cost or insertion cost is $3,000 plus any administrative fees tacked on top.
Actual cost at this point doesn’t yet include the cost of the creative development or any indirect & fixed costs. In most cases this is easy to calculate, but many times for complex integrated marketing campaigns, there can be many common costs.
For example, what is the cost of a TV ad that is re-purposed to display on YouTube? Should the full cost of production of the video be allocated to TV, or should it be partially allocated to the cost of the YouTube insertion?
‘R’ as in Return
Returns are much more difficult to determine. The ‘Returns‘ in an ROI Formula for Marketing are determined by including only the incremental profit generated by a particular advertisement. Although it may be true that an ad may generate a certain level of sales volume, it may be that some of those sales may have been generated without the advertisement. This is why we need to always use only the incremental volumes.
Secondly, the profit margin for the incremental volume needs to be determined. Normally, this may include fixed as well as variable costs. Technically, if the advertisement is truly going to generate incremental volume (and that is the business question to be decided) then the fixed costs need to be ignored. These would be incurred whether the ad is run or not. In many cases, the fixed costs may not be known or the company simply provides as a matter of policy the margin including the fixed cost. There is a lot more information on this that can be found on any managerial accounting textbook.
The ROI formula (provided as a percent) is (Returns – Investment) ÷ Investment * 100%
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