While it’s a well-known fact that many of the best small business owners didn’t attend formal business education, there are a couple lessons that may have been useful. Here’s a quick tutorial on how to calculate and understand Return on Investment (ROI).
I’ve had several B2B marketing clients recently ask me what their expected Return on Investment (ROI) would be for a particular tactic.
When thinking of a tactic where you can easily track the number of dollars earned or number of sales made calculating ROI is very straightforward:
ROI = (Total Profit from Tactic – Total Cost of the Tactic) /Total Cost of the Tactic
What happens when you try to calculate ROI for a tactic where the profit is not known?
In these scenarios it is helpful to think of the number of sales you might get from a given tactic and associate a value to that sale.
Let’s say for example you are thinking of sponsoring a charity event. You know that there will be 100 people in attendance and that these 100 people represent your target market well. You may also know that when you have the opportunity to engage directly in conversation with a particular prospect your ability to close that business is about 20%. Let’s assume that half of your guests are not a fit (maybe they already have your product or service, or are not in the market for it at the moment) and that another 50% you won’t have a chance to engage with. From here we can calculate the total number of leads expected: Total Guests x 50% (to account for qualification) x another 50% for capacity and finally X another 20% (your close rate). You are then left with 5.
All that is left is to understand the value of each sale and you can plug your data into your formula:
ROI = [(Profit per sale x 5) – Total Cost of the Tactic] /Total Cost of the Tactic
Finally there are scenarios where even the number of sales is difficult to calculate. This may be the case with tactics like branding where any given sale can be attributed to a great many things and difficult to correlate back to just branding.
In this case you want to understand the total number of leads one might expect and associate a value to those leads.
The same formula applies but this time your Total Profit from Tactic is represented by your estimated number of leads and their respective values.
ROI = [(Number of leads expected x Close Percentage) – Total Cost of the Tactic ] / Total Cost of the Tactic
ROI can and should be calculated for every tactic you are considering to understand where your marketing dollars are hardest at work. If you need help understanding the real value of your marketing efforts let us know – we’d love to help.