How to Calculate Marketing ROI

August 3, 2012

You can easily gather lots of data on impressions, delivery rates, open rates, click through rates, and conversions from your online marketing campaigns, but on their own those metrics say nothing about the actual business impact of the campaign. And they don’t help you make sound decisions about including specific tactics in your future campaigns. No wonder most of those metrics are often referred to as “vanity metrics” – they may make you feel good about the performance of a campaign, but they fall short on providing real insight. Unless you’re carefully calculating your Return on Incremental Marketing Investment (ROIMI), you may be wasting your money or missing out on great opportunities to drive your business forward.

When an immediate increase in sales is the objective of your campaign, ROIMI is quite simply the best measure of the short term financial impact of an incremental marketing spend. It can also be used for lead generation, opt-in, and any type of conversion action that you can assign a financial value to. ROIMI calculates the amount by which the net financial gain from a given tactic exceeds the incremental cost of including it in your marketing mix.

A serious but common mistake is to declare a campaign a success if the additional gross revenue generated exceeds the cost of the campaign. Generating an additional $10,000 in revenue from a marketing campaign that costs $6,000 feels good. After all, you made $4,000, didn’t you? But what if your incremental cost to manufacture, sell, and deliver the products or services sold was more than $4,000? The more sales you generate, the worse off you actually are.

How to calculate ROIMI

ROIMI accurately measures the short term financial impact of adding a new tactic to your marketing campaign mix, relative to not including that extra tactic in your mix. Here is how it is calculated:

 

ROIMI = [Incremental Revenue Attributable to Incremental Marketing ($) * Contribution Margin (%) – Incremental Marketing Spending ($)] /Incremental Marketing Spending ($)

If ROIMI is positive, your campaign had a net positive impact on your business. If it is negative, your campaign is a money-loser.

A key element in the calculation of ROIMI is contribution margin. It is a measure of the net financial gain from a campaign that is available to cover your fixed costs and contribute to your profits

Contribution margin (%) = [revenues – variable costs to produce and sell]/revenues

It is important to distinguish contribution margin from gross profit. Contribution margin measures the true incremental impact of executing a tactic. It considers only variable costs: the incremental costs that you incur to make, sell, and deliver the additional products or services that you sell as a direct result of the campaign. It ignores all fixed costs since you incur them whether you include an additional tactic in our campaign or not. In contrast, the calculation of gross profit subtracts an amount of fixed costs attributed to each unit produced.

ROIMI Example

An automotive service company is considering a direct mail campaign to promote a spring tune-up offer. The campaign costs $5,000 and is expected to increase springtime revenues from $85,000 to $95,000, for an incremental revenue of $10,000. The contribution margin ratio for the spring service (accounting for  the incremental cost of labor and parts attributable to the extra business) is 40%. Should the dealership run the campaign?

A simplistic ROI calculation might conclude that the campaign will generate $10,000 in extra revenue while only costing $5,000, so it is worthwhile. But ROIMI tells a different story:

ROIMI = [$10,000 * 40% – $5,000]/$5,000 = -20%

In this case, the company would actually lose money since the campaign generates a contribution of only $4,000 but costs $5,000.

Bottom Line

Master the calculation of ROIMI to make sure that the tactics you include in your next campaign will actually have an incremental, positive impact on your business. For a more detail on ROIMI and other important metrics, read Marketing Metrics: The Definitive Guide to Measuring Marketing Performance , an excellent book on the subject.

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