Marketing ROI

12 Key excerpts on "Marketing ROI"

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  eBook - ePub

  Marketing by the Numbers

  How to Measure and Improve the ROI of Any Campaign

  • Leland HARDEN, Bob HEYMAN(Authors)
  • 2010(Publication Date)
  • AMACOM

    (Publisher)

  Overhead calculation formulas : These govern the calculation of overhead expenses that may or may not be charged back to the marketing department. In larger organizations, the marketing department is often presented with a number or a figure to include among expenses, which may or may not be a true reflection of marketing’s overhead costs. Allocating the expense of overhead within a marketing department allows for some flexibility, so you should know how to do this effectively. We discuss this in detail at the end of the chapter.

  Performance formulas : These are ratios and tools to measure performance, profit and loss, and actual figures that indicate revenue return on investments or other cash outlays. Return on investment is a standardized mathematical formula used in accounting that can be applied to marketing investments in the same way that ROI is calculated for the building of new factories, acquisition or shedding of business units, and hiring of staff.

  Your Star Performer: ROI

  Yes, ROI is a performance measurement, but not all performance measurements are designed to yield ROI. Soft metrics common to advertising, such as brand awareness, engagement, loyalty, purchase intent, and even “impressions” can help to explain what your money was supposed to do, but they have no place in Marketing ROI. In accounting terms, such data are merely termed proxy measures .

  Here’s the formula for classic ROI: (Net Revenues – Marketing Investment) ÷Marketing Investment × 100 = ROI% In simple English, you derive ROI in three steps using only two numbers:

  First, you obtain a dollar figure that represents your net revenues , after subtracting a dollar figure that represents your spending, that is, your marketing investment .

  Second, you take that total (net revenues minus marketing investment ) and divide it by the marketing investment .

  Third, this number is then multiplied by 100 to achieve the percentage of ROI.

  ROI is always expressed as a percentage, as it is meant to be compared to other forms of investment by the organization, or payments that achieve a similar valuable return. This can be the investment in the building of a factory, or it can be socking away several hundred thousand dollars in an interest-bearing bank account. (For a more in-depth explanation of ROI calculations, please see the Special Section at the end of Chapter 7

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  The Economy of Brands

  • J. Lindemann(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Calculation of ROI is relatively easy, the benefit or return of an investment is divided by its costs. To make the investment worthwhile the benefit has to exceed its costs. The result is expressed as a percentage or a ratio that assesses the investment. The return on investment formula is simple: ROI = Net Return/Investment If an investment has a negative ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. ROI is a very simple and versatile tool as it can be applied to nearly all investment decisions. The resulting ratio provides a clear and eas- ily understood result. The difficulty with ROI lies in the definition of its two components: return and investment. For example, a mar- keter may compare two different brands by dividing the revenue that each brand has generated by its respective marketing expenses. A finan- cial analyst, however, may compare the same two brands by dividing the net income of each brand by the total value of all resources that have been employed to make and sell the brands. Thus the ROI can be positive for the marketer but negative for the financial analyst. Under- standing the inputs is therefore crucial in assessing ROI. This becomes even more complex and controversial when assessing ROI for specific functions and departments such as marketing or R&D. Brand ROI Return on brand or marketing investment is defined as the relation- ship between the spend on and investments in the brand and the economic return they create. Brand ROI is a metric for optimizing mar- keting spend for the short and long term by comparing brand specific economic returns and investments. An improved brand ROI will lead to increased revenues and profits for the same amount of spend. The assessment is complicated by the time impact of marketing investments and initiatives. Some brand initiatives such as direct mail campaigns focus on short-term sales increase and value creation. Others, such 135

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  Marketing Communications

  • Lynne Eagle, Barbara Czarnecka, Stephan Dahl, Jenny Lloyd(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  That said, there can be no doubt that the benefits of monitoring and measuring levels of return have the potential to yield huge benefits. An understanding of the relative levels of potential return can be used to maximize the value obtained from limited marketing budgets. It can be a persuasive tool when bidding for funding and, on an individual level, can be used as evidence of success when seeking career advancement.

  Yet in order for ROI systems to be effective, marketers must first have a definitive vision of what they are trying to achieve and how it might best be measured. This requires an organization to have a clear understanding of their current position and an effective process of objective-setting at all levels. Only then are marketers in a position to measure the relative effect of their actions.

  Review questions

    1. Define what is meant by the term ‘return on investment’ within a marketing context.

    2. Distinguish between the terms ‘return on investment’ and ‘marketing effectiveness’. Why do you think these terms are sometimes, if mistakenly, used interchangeably?

    3. What are the benefits of measuring return on investment and/or marketing effectiveness? What are the challenges?

    4. Discuss the importance of ‘objectives’ within the context of an IMC campaign. Why are they so essential to the measurement of ROI and marketing effectiveness?

    5. Distinguish between the following concepts and explain their value within the measurement process:

  • pre-testing

  • tracking

  • post-testing.

    6. The objective of an IMC campaign is to increase the sales of sun hats from 120,000 to 160,000 per annum. However, it is very successful and actually generates sales of 180,000. What is the percentage effectiveness of the promotion?

    7.

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  The Economist: Marketing for Growth

  The role of marketers in driving revenues and profits

  • Iain Ellwood(Author)
  • 2014(Publication Date)
  • Economist Books

    (Publisher)

  Return on investment: measurement and analytics

  THE ROLE MARKETING PLAYS has a critical impact on the financial performance of a business, yet many still feel that marketing is a discipline that is hard to align to anything other than soft measures such as brand consideration (how many people might consider a particular brand) or brand equity (what attributes – such as friendliness or trust – are associated with a specific brand). In the 2011 IBM Global CMO Study nearly two-thirds of respondents (63%) rated return on investment (ROI) as the most important measure, but fewer than half (44%) felt capable of measuring it accurately.

  Marketing has clearly moved on from the heady days of the 1950s and 1960s when the ability to engage a stellar advertising agency and post a billboard was enough to establish a brand’s status. Greatly increased competition, global markets and a proliferation of media channels make it much more difficult to decide how to allocate marketing spend – and to justify what is spent on what. Even in healthy economic times, there is much less of an appetite than before for the big spend unless it is linked to clear business results. But it is possible to link information about customers’ needs, preferences, habits and behaviour to the financial impact of a business’s sales and marketing activities. It comes down to making sure that the right thing is being measured. There are four stages of information gathering and analysis that will help marketers develop a business case for a marketing strategy:

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  Cost Analysis Of Electronic Systems

  • Peter Sandborn(Author)
  • 2012(Publication Date)
  • WSPC

    (Publisher)

  Keep in mind that the calculation for return on investment, and therefore the definition, can be modified to suit the situation, depending on what you include as returns and investments. The definition of ROI in the broadest sense attempts to measure the profitability of an investment and, as such, there is no single“right” calculation. For example, a marketing organization may compare two different products by dividing the revenue that each product generates by its respective marketing expenses. A financial organization, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. This flexibility has a downside because ROI calculations can be easily manipulated to suit the user's purposes and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used and use them consistently.

  ROIs are easy to calculate but deceivingly difficult to get right. Financial investment ROIs are straightforward, but when evaluating the ROI of a cost savings, market share increase, or cost avoidance, the difference between costs that are investments and those that are returns is blurred.

  17.2. Cost Savings ROIs

  In this section we present several examples where the ROI associated with a cost savings is desired. This type of ROI could be needed to justify the investment (or use) of money when the return is a savings.

  17.2.1. ROI of a manufacturing equipment replacement

  In this example, consider the ROI associated with replacing an old piece of manufacturing equipment with a newer piece of equipment. Consider the input data summarized in Table 17.1

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  Cost Analysis Of Electronic Systems (Second Edition)

  • Peter Sandborn(Author)
  • 2016(Publication Date)
  • WSPC

    (Publisher)

  Keep in mind that the calculation for return on investment, and therefore the definition, can be modified to suit the situation, depending on what you include as returns and investments. The definition of ROI in the broadest sense attempts to measure the profitability of an investment and, as such, there is no single “right” calculation. For example, a marketing organization may compare two different products by dividing the revenue that each product generates by its respective marketing expenses. A financial organization, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. This flexibility has a downside because ROI calculations can be easily manipulated to suit the user’s purposes and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used and use them consistently.

  ROIs are easy to calculate but deceivingly difficult to get right. Financial investment ROIs are straightforward, but when evaluating the ROI of a cost savings, market share increase, or cost avoidance, the difference between costs that are investments and those that are returns is blurred.

  17.2Cost Reduction and Cost Savings ROIs

  In this section we present several examples where an ROI associated with reducing or saving cost is desired. This type of ROI could be used to justify the investment (or use) of money when the return is a savings.

  17.2.1ROI of a Manufacturing Equipment Replacement

  In this example, consider the ROI associated with replacing an old piece of manufacturing equipment with a newer piece of equipment. Consider the input data summarized in Table 17.1

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  Review of Marketing Research

  Volume 6

  • Naresh K Malhotra(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Use of this metric promotes accountability for marketing spending, enables comparison across alternatives to decide on the best action, and furthers organizational learning and cross-functional teamwork. Unfortunately, managers are struggling to define and calculate ROMI (Woods 2004), especially outside the price/promotions domain (Bucklin and Gupta 1999). A survey of over one thousand C-level managers (CMO Council 2004) revealed that over 90 percent of marketing executives viewed marketing performance metrics as a significant priority, but that over 80 percent were unhappy with their current ability to measure performance. Only 17 percent of marketing executives have a comprehensive system to measure marketing performance. The companies they work for outperformed other firms in revenue growth, market share, and profitability. Thus, most organizations experience considerable roadblocks to fulfilling the appealing promise of measuring ROMI and using it to enable better marketing decisions and higher performance. Since most financial decisions in the non-marketing domain are typically based on their return on investment, the absence of ROI calculations for marketing activities makes it harder to obtain funding for them.

  Several reasons underlie these difficulties, from the improper use of the term “return on investment” for measures that do not include profits/margins or investment costs (Lenskold 2003) to the lack of research into how return on marketing investment can be measured and how it can be used to enhance performance (Pauwels et al. 2008). Indeed, while many marketing practitioners and academics have expressed concern about marketing accountability and return on investment, the current push has come largely from outside the field, notably top management and finance (Lehmann and Reibstein 2006). Unfortunately, CEOs and CFOs have been disappointed by the most common responses of the marketing field, from “it is hard to judge the impact of marketing spending since so many factors come into play between the spending and the ultimate financial result” (marketing practice) to “we already show it through our sales response functions” (marketing academia). The authors’ experience in recent years demonstrates that such positions are of little help in bridging the gap between marketing and finance fields, enabling joint understanding and trust in ROMI calculations and ROMI-based decisions and building the standing of marketing in the C-suite.

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  The SAGE Handbook of Marketing Theory

  • Pauline Maclaran, Michael Saren, Barbara Stern, Mark Tadajewski, Pauline Maclaran, Michael Saren, Barbara Stern, Mark Tadajewski(Authors)
  • 2009(Publication Date)
  • SAGE Publications Ltd

    (Publisher)

  If marketers’ goal in espousing ROI is to con-vince their finance colleagues that they are serious about accountability, it is counterpro-ductive to define ROI in a way that their finance colleagues do not recognise. Srivastava and Reibstein (2005) drew atten-tion to a logical flaw with using ROI for per-formance evaluation, i.e. dividing the profit by expenditure whereas all other net benefit metrics are calculated by subtracting expendi-ture. Division rather than subtraction creates a conflict between cash flow or profit (subtrac-tion) and the ROI ratio (division). Marketing’s mandate is to generate the maximum cash flow for the business, not to maximise the efficiency of any one form of investment. The profit or economic value added or increase in shareholder value from marketing all require the costs to be subtracted from sales revenue along with the other costs. The law of diminishing returns explains why pursuing ROI causes underperformance 390 THE SAGE HANDBOOK OF MARKETING THEORY and suboptimal levels of activity. After ROI is maximised, further sales will still make profits but at a diminishing rate until the response curve crosses the expenditure line to yield incremental losses. That is the point of maximum profitability (in terms of the quantum of profits). Other problems with ROI as a performance measure include: Knowing what the performance would have been ● without the marketing activity being considered. In other words, what is the baseline used for comparison? Looking only at short-term performance and ● ignoring changes in brand equity (that is nec-essary to adjust for inherited and postponed effects). Marketing expenditure is not necessarily ‘invest-● ment’ as the use of ROI implies. It is expensed through the Profit and Loss (P&L) Account and not added to the Balance Sheet.

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  Maximizing Benefits from IT Project Management

  From Requirements to Value Delivery

  • Jose Lopez Soriano, José López Soriano(Authors)
  • 2016(Publication Date)
  • CRC Press

    (Publisher)

  A second possible cause of ROI deviation occurs when one of the parameters used in calculations is not considered key, either because its potential impact is deemed negligible or it was assumed to not influence the planning horizon of the project. The project outcome then shows an ROI that is different than expected, with that difference being due to the parameter that was minimized during ROI calculations. Nevertheless, the cause should be reviewed and managed to avoid this problem in the future. In this case, we should examine the assessment model as a whole, making note of how the parameters affected the accuracy of ROI calculations.

  Finally, The ROI may be inaccurate because of simple errors made in calculating it, or in estimating values used in the calculation. In this case, we must simply correct any input errors made and recalculate the correct ROI value.

  Despite the difficulties associated with ROI calculations, this approach is a great tool for supporting the decision-making process on projects and investments. It introduces a level of professional rigor into project management in a manner similar to that done for the selection of financial investments in the world of economic and financial management.

  ROI Concepts

  ROI is a simple measure of the expected profit or loss result of a particular investment, which may take the form of returns, receipts, revenue, interest, or capital, and represents an increase or decrease in the assets of the investor. This metric is systematically used for making investment decisions based on predictive economic and financial indicators of value resulting from an investment’s performance and behavior.

  ROI enables a uniform framework for financial comparisons, such as:

  • Selection of financial investments of any kind
  • Selection of alternative investment projects
  • Comparison of financial results of companies and industries

  ROI use requires the adoption of certain precautions to ensure the homogeneity of the data obtained. Among the precautions that can be taken into account, we should pay particular attention to the following:

  • We must determine how local and national tax laws will affect the investment project. In principle, if we are comparing investments or projects that will all be influenced by the same tax laws and rates of taxation, then the contrast should be negligible and the effect of taxation can generally be ignored, simplifying the ROI calculations. However, if the investments comparison involves different countries, different tax regimes, or different tax reporting timeframes, it then becomes desirable to provide tax details in the ROI calculations. Otherwise, any subsequent decisions made could be suboptimal when the effects of different tax structures are not properly accounted for.

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  Bottom-Line Call Center Management

  • David L. Butler(Author)
  • 2007(Publication Date)
  • Routledge

    (Publisher)

  For a manager to make an argument for his/her center’s solid performance, he/she must demonstrate this to the boss in a report, which has some form of logical and rational numerical support and measurement. Stating that “My center is great. My employees are happy and the customers seem to like us” without any support will only serve to have a domestic center move faster along the cycle to overseas outsourcing and the manager seeking other employment opportunities. Wise executives in a company/organization will seek hard and fast numbers to justify the performance of a call center. Now, most call centers with the latest technology will be able to produce reports ad nauseam. However, what do these reports mean? What value does that add to the center? What do they communicate to the executive on how the budget was spent most effectively or revenue stream per person generated? Remember, the rule about running a business is to bring in more money than you spend. This is called profit. The higher the profit the better because the profit can be reinvested into new opportunities and human capital to generate even more profit. Though governments and non-profits do not have the same profit reporting functions as do for-profit companies, this does not mean that these organizations are not concerned with the most efficient means of production possible—a strong ROI. Though the goal is not the same as a for-profit company, the logic behind the efficiency remains the same. To make the best sell possible to the leaders of the company or organization, a manager must be armed at all times with data to justify the centers’ existence and value added to the company/organization. If this cannot be established, the center will eventually disappear.

  Return on Investment

  Brief History

  ROI has been around since before the 1920s. In recent years, ROI has expanded to a wide range of investments, including human resources, training, education, change initiatives, and technology. Today, hundreds of ROI calculations have been created or are under development for programs. “As long as there is a need for accountability of … resource expenditures and as long as the concept of an investment payoff is desired, the ROI process will be used to evaluate major … investments” (Phillips, Stone, and Phillips, 2001, pp. 2–3).

  Why ROI?

  Developing a strong and balanced set of measures, including measuring ROI, has gained a strong position in many fields. The topic of ROI appears through conference proceedings, on the cover of newsletters, and as the focus point of journals, both trade and academic. Clients are requesting that ROI calculations be conducted for various programs and initiatives within their division or unit, both in private and in public sector organizations. Even top executives in major companies have increased their knowledge and interest in ROI related information (Phillips, Stone, and Phillips, 2001, p. 12).

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  Applied Marketing

  Connecting Classrooms to Careers

  • Daniel Padgett, Andrew Loos(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  In addition to assessing the effective- ness of each part, marketing managers also want to know how the campaign is doing overall. • The first indication many marketing managers consider is sales figures. • The first metric, market share, is defined as the percentage of the total sales in a product category going to a particular brand com- peting in that category. • Relative market share is often used in conjunction with market share when marketing managers want to compare movement in market share for their brands against that of other competitors, often the market leaders. • The third metric, return on investment (ROI) is also a widely used metric of success and very frequently used to measure long- term strategic success. • Return on marketing investment (ROMI) is a similar metric to ROI that may be more easily applied to the evaluation of market- ing tactics. The idea behind ROMI is to isolate the returns attrib- utable directly to marketing efforts from those of other parts of a business. 13.3 Product-Related Metrics: Covering the Cost of Delivering Benefits to Customers • MRD applies to all elements of the marketing mix—product, price, place, promotion, and participation, and there are metrics by which to assess the effectiveness of decisions made regarding each. There are several major product-related MRD metrics. • Marketing managers are highly interested in the metric brand trial rate which gives an indication of how well a brand is accepted by new users. • Market penetration is a metric identifying the percentage of a tar- get market that has tried the product at least once, but perhaps more important is brand growth. To be meaningful, brand growth should be compared to overall category growth. Brands growing more slowly than the entire category are losing ground and may require additional investments or other tactical adjustments.

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  ROI at Work

  • Jack J. Phillips(Author)
  • 2005(Publication Date)
  • Association for Talent Development

    (Publisher)

  Current Status One thing is certain in the ROI debate: It is not a fad. As long as there is a need for accountability of learning expenditures and the concept of an invest- ment payoff is desired, ROI will be used to evaluate major investments in learning and performance improvement. A fad is a new idea or approach or a new spin on an old approach. The concept of ROI has been used for centuries. The 75th anniversary issue of Harvard Business Review (HBR) traced the tools used to mea- sure results in organizations (Sibbet, 1997). In the early issues of HBR, during the 1920s, ROI was the emerging tool to place a value on the payoff of investments. With increased adoption and use, ROI is here to stay. As highlighted in table 1-1, today more than 2,000 organizations are routinely developing ROI calculations for learning and performance improve- ment programs. Specific applications began in a manufacturing sector, where ROI was easily developed. It migrated to the service sector, health care, the public sector, and now the educational sector is interested in ROI. Recent applications involve measuring the ROI for a graduate degree program, in-service teacher training, and continuing education programs at universities. The use of ROI in training organizations continues to grow. Among those included on Training maga- zine’s 2004 list of the top 100 organizations, 75 per- cent are using the ROI Methodology (Training, 2004). A major study by the Corporate Executive Board indicated that ROI is the fastest growing metric in learning and development (L&D). It is also the met- ric that has the widest gap between actual use and desired use, underscoring the many misconceptions about ROI (Drimmer, 2002). It is estimated that 5,000 studies are conducted each year globally by the organizations using the ROI Methodology. This number is based on the number of organizations that have participated directly in the certification for the ROI Methodology.

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