Sales is not a marketing strategy.
Anyone can get sales, but what happens if your marketing only sells your low margin products? You will loose money and those sales put you out of business.
If that doesn’t make sense I suggest you go back and find the episode of I Love Lucy when Lucy and Ethel were selling salad dressing. In a very basic way the show took viewers through the basics of business. Your products have to cost less to make and sell than you actually sell them for.
So to calculate The ROI (Return on Investment) you need to subtract the cost of marketing from the total sales.
Sales – Costs = ROI
Cost of Marketing
That’s the one that messes most people up. You don’t account for the total costs, assuming time and discounts are covered in markup and overhead. That’s just plain bad business.
It’s not merely a matter of mark up. You have to know what costs you are absorbing into your mark up to know how much profit there actually is, if any. And you have to keep a close eye on that and what the market is willing to spend to see if you should, well, even bother.
Of course sales is an objective. It’s an overall reason to go into business. But if you don’t know the ROI of marketing and operations, you will likely bleed out of business.
We talk a lot of ROI, but how to be calculate and predict it? Well, first you have to have targeted goals and objectives for your campaigns, initiatives and tactics. You need a plan, you need a strategy. Once you have that in place, you can begin to follow the basic ROI calculations.
Depending on your goals some of the details may change. Conversions may be sales, purchases of specific items or thresholds, leads, clicks or downloads. But overall, the following specifics need to be tracked for all single tactics and multichannel initiatives to determine if there is a viable ROI for the campaign.
Track the following to Determine the ROI on your initiatives:
Costs of Marketing
- Total internal costs (production, meeting, admin hours) – this can be an actual cost if available, or a tally of the hours x a blended hourly rate
- Total external costs – these include insertion, printing, distribution and/or (prorated) agency fees
- Cost of promotion — this is the discount offered and is calculated based on the expected conversions. It can be a dollar or percentage amount, noting the deduction of any retail markup. Once the full analysis is being done this should be replaced with actual numbers from the actual conversions.
- Total Promotion Conversion ($) – total dollars brought in as a direct result of the campaign.
Initial Marketing ROI
Sales – Cost of Marketing = ROI
Additional ROI Datapoints
- Total Conversions (#) — total number of transactions
- Total New Customers – a subset of the above
- Total Returning Customers — a subset of total
- Conversion Averages by Customer Type
- Average conversion amount
- Average conversion for new customers
- average conversion for returning customers
Calculate cost per conversion type
Then use these calculations to review the overall ROI performance of the campaign
Total Conversion ($) less Total Costs (internal and external, and cost of promotion) = Cost per Conversion
Depending on the objectives of the campaign, you can determine the cost to acquire a new customer, and when compared against the average Lifetime Value of each customer, you can determine if the campaign was more successful in gaining new customers or engaging existing.
These are the very basic datapoints that should be included in every single initiative, tactic or overall campaign. There are many more to assess the targeted goals as well as additional non-targeted outcomes of any activity.
Marketing ROI is that simple, and that complicated. And using it properly can get you the right sales, not just your loss leaders.
If you need help with your marketing ROI, or developing your marketing strategy, let’s talk.
I can help you chart your course to success.