One of the biggest problems that entrepreneurs and small business owners face is coming to terms with making marketing investments in their businesses.
Unfortunately, many of them tend to be shortsighted and look only at the initial outlay to develop, create and implement a marketing campaign.
But a marketing campaign, done right, is an investment in your business with the ultimate goal of increasing brand awareness, more prospects, more customers, and – ultimately – great PR and more profit.
Just like any other investment, and investment in a marketing campaign needs to be measured and the results monitored and evaluated to ensure that your marketing budget is being appropriately allocated. With proper monitoring and calculation of ROI, you can focus on those campaigns that deliver the best results, regardless of your product or service. Remember, not all marketing campaigns are created equal.
When times get tough, the marketing budget is always the first to be slashed. This is completely counterintuitive, since marketing is an investment designed to produce revenue for your business. By learning to determine and measure your ROI on marketing campaigns, you can gain comfort that your marketing budget is not just some fluffy expense that you can throw away during times of economic difficulty.
One common mistake that many small business owners make when calculating ROI is to simply calculate profit minus investment to determine their return. For example, if you invested $50,000 in a marketing campaign and ended up with $100,000 at the end of the project, the simple calculation is that you received a 100% return on your investment. Now, although this calculation might work in simpler applications, it is not an accurate picture of your marketing ROI.
Measuring ROI for marketing campaigns can be complex due to the many variables on both the profit side and the investment side of the equation. Understanding the formula is key to producing the best possible results for your marketing investments.
There are many ways to calculate marketing ROI but the best formula, in the simplest terms, is:
(Gross Profit – Marketing Investment)
When you apply the example I gave above, you can see how this formula changes the performance of the marketing campaign. If your typical profit margin for your product or service is 50%, that means that only 50% of the $100,000 in revenue was actually gross profit, the other 50% being attributed to create the product or service that was being sold. So, in this example, your actual ROI on the campaign is zero.
Now this does not mean that you should not be investing in marketing; it simply is intended as an example to show you that without proper calculation of ROI, you can be misled, leading to disappointment. There are many ways to determine ROI, depending on the intended outcome of each individualized campaign. Therefore, it is often a good idea to turn to a professional marketer for assistance in determining your goals and leveling your expectations.
Until next time…
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