The Marketing ROI Calculator – The Simple & Proven Formula for Calculating True Marketing Cost, Value and ROI

Put Your Marketing Team & Your Marketers on Notice! Your company will start using this proven formula to measure true marketing ROI !!

Introducing…The Marketing ROI Calculator – The Simple & Proven Formula for Calculating True Marketing Cost, Value and ROI !!

  1. Having trouble figuring out the value of your marketing efforts?

  2. Need a proven formula to calculate true marketing ROI?

  3. Want to continue marketing efforts that work and provide net income and abandon those efforts that are a net loss?

  4. Seeking to implement an improved world-class and six sigma marketing process to increase your marketing effectiveness while decreasing your marketing costs?

If you answered “yes” to any one of these questions, read the rest of this blog that delivers the true marketing ROI formula to help develop measured ROI driven marketing!

{Note: this is just one of many formulas variants I have developed for calculating marketing ROI and the actual one to implement will depend on the type of marketing you are performing}. 
The Marketing ROI Dilemma

The Marketing ROI Dilemma

Before we get into the main marketing ROI formula, I want to point out a relevant quote and sentiment from John Wanamaker who was an American merchant, civic and political figure, considered by some to be a pioneer in advertising and marketing. To that end and related to this topic, John Wanamaker once had a famous quote to illustrate his frustration with the inability to determine if his marketing and advertising spend was truly effective and if it was producing the expected ROI. This famous quote is as follows:

John Wanamaker & His Famous Marketing & Advertising Quote

John Wanamaker & His Famous Marketing & Advertising Quote

X

The following blog content is focused on introducing the proven formula, in use by some advanced marketing companies across the US, for calculating marketing and campaign ROI designed to drive sales orders. The marketing ROI formula will be broken down in sections and then by individual fields. We will cover how the formula is used, what internal six-sigma marketing processes need to be put in place to support the population of this formula and how each field is calculated or derived.

Introducing the Tried and True Full Marketing ROI Formula:

Complete Marketing ROI Formula

Complete Marketing ROI Formula

This formula consists of a pre-launch campaign section illustrated in yellow above and a post-launch campaign section for the entry/update of actual campaign post-launch effectiveness and ROI.

Let’s now review each section in detail as follows: Pre-Launch ROI formula section:

Campaign Pre-Launch Marketing ROI Formula

Campaign Pre-Launch Marketing ROI Formula

x

The first column of the pre-launch marketing ROI formula (“Campaign Number”) should be a uniquely identifiable campaign number or code being updated from your marketing automation system and the 2nd column (“Campaign Description”) should be the main goal of the marketing campaign (Customer: acquisition, retention, up-sell, cross-sell, branding or awareness, urgent business alert of crisis communication, etc.).

The 3rd column of the pre-launch marketing ROI formula (“Campaign Quantity”) is the campaign quantity being delivered to your customer audience (i.e. number of e-mails being delivered, mail, texts, etc.)

Campaign Quantity

Marketing Campaign Quantity

The 4th column of the pre-launch marketing ROI formula (“Materials and Labor Cost”) is critical to the ROI formula and will likely require a few marketing process changes, as well as IT system changes. A true six-sigma structured process marketing environment will require your company to track all labor hours and materials cost associated with the planning, development and launching of any and all campaigns. This requires that you create a work breakdown structure (WBS) to appropriately track hours and materials associated with each campaign you conduct. By doing this you will finally have the fully loaded cost for each campaign such as creative hours spent, strategy planning time, cost of materials (for direct mail, outsourced text or e-mail, etc.). The cost shown is the per-unit cost to send the campaign or 34 cents for each delivered campaign item.

Marketing Materials & Labor Cost

Marketing Materials & Labor Cost

The 5th column of the pre-launch marketing ROI formula (“Total Mktg. Cost”) is merely the unit cost expanded out to the total cost of the campaign (10,000 x. 34). If your delivered item is a single unit campaign quantity like web landing page, your campaign cost simply becomes the total labor hours used to develop this page and you can skip both columns 3 & 5.

Total Marketing Cost

Total Marketing Cost

x

The 6th and last column of the pre-launch marketing ROI formula (“Plan Campaign Dates”) is the expected campaign execution dates that the orders (shown in the post campaign section) will be tracked against this particular campaign.

Planned Campaign Dates

Planned Campaign Dates (that orders will be tracked against)

x

Let’s now review the last section of the marketing ROI formula in detail as follows: Post-Launch ROI formula section:

Campaign Post-Launch Formula

Campaign Post-Launch Formula

The first column is the actual campaign dates that the campaign executed in order to compare it to the planned campaign dates

To obtain the 2nd column of the post-launch marketing ROI formula (“# of Orders”) will require your company to develop the process of direct campaign attribution so that when customers order an item based on a campaign, those customers are incented to provide the campaign code (e.g. in exchange for a small discount) they viewed that drove them to order the item. By making this marketing process change, you have a direct way to track which campaigns drove which orders, by how much, etc. Car rental companies are excellent at this since every coupon is tracked with an encoded code such that they know exactly where the coupon was obtained, what campaign it was associated with, etc.

Number of Orders Associated with Campaign

# of Orders

x

The 3rd column of the post launch marketing ROI formula (“Actual RR %”) is the redemption rate (RR) or simply the number of orders driven by the campaign, divided by the campaign quantity launched (column 3 of the pre-launch form).

Rate of Return for Campaign

Rate of Return

x

The 4th column of the post launch marketing ROI formula (“Avg. Order Sold”) is the average order sold which is populated by your order system and is simply the total value of all orders divided by the number of orders. In this case the total of all orders is equal $2,175 (this becomes the 4th column, “Bookings”) divided by 15 orders = $145 average per order.

Average Order Sold (AOS) $$

Average Order Sold $$

x

The 5th column of the post launch marketing ROI formula (“Bookings $$”) is simply the number of orders multiplied by the average $ per order or, in this case, 15 orders x $145 per average order = $2,175.

Bookings $ from Orders

Bookings $ from Orders

x

The 6th column of the post launch marketing ROI formula is the Average Cost of Goods Sold (“COGS %”). In this case, the company has calculated that, historically, the cost of an average order is approximately 30% of an orders value. Another way to state this is that average margins are 70% and 30% is the cost to produce an order.

Cost of Goods Sold (Avg.) %

Cost of Goods Sold (Avg.) %

x

The 7th column of the post launch marketing ROI formula (“COGS $”) is simply the COGS sold percentage (30%) multiplied by the total bookings $$ value ($2,175 x 30%) = $652.50

Cost of Goods $$

Cost of Goods $$

x

The 8th column of the post launch marketing ROI formula (“Contribution $$”) is where we finally calculate the total ROI of the campaign via this simple 2 step process:

  1. Add the cost of the labor to produce the campaign as calculated in column 5 of the pre-launch formula to the cost to produce the orders that the campaign specifically drove.

  2. Subtract the total value of orders from #1 above.

Using the example shown in the full marketing ROI formula above, we first add the pre-launch materials and labor cost of $3,400 to a Cost Of Goods Sold (COGS) cost of $652.50 = ($3,400 + 652.50) = $4,052.50 We then subtract this total campaign cost from total bookings value of $2,175 = -$1,877.50.

Contribution $$

Contribution $$

The 9th and final column of the post launch marketing ROI formula (“Cost Per Order”) is simply the total number of orders divided by column 7 (“Contribution”) to determine how much each order is benefitting or costing the company when produced. In this case it is a contribution of -$1,877.50 divided by 15 = -$125.17.

Cost Per Order

Cost Per Order

Per the last section, it is important to note that, the greater the number of orders, the more likely the cost will go from a negative contribution to a positive. This occurs because you have generated enough bookings $$ to exceed the cost of the overhead associated with the labor cost to develop and launch the campaign.

Break even for this campaign would be to sell at least 34 orders where the contribution finally turns positive of $51 and the cost per order becomes +$1.50. Selling beyond 34 orders becomes pure profit for the campaign and adds to the bottom line contribution.

This sample below shows the equation using break even orders (“# of Orders”) of 34:

Campaign Break Even Example

Campaign Break Even Example

I have helped numerous companies across the US implement, not only the marketing ROI formula/equation, but an entire world class & six-sigma marketing process that accompanies the ROI formula.   Implementing this six-sigma marketing process includes implementing a marketing and campaign work breakdown structure (WBS), campaign tracking codes, a set of governing marketing performance metrics and benchmarks and much more.

Once this six sigma process architecture is in place, companies are able to implement a full closed loop marketing process and enable full marketing ROI and effectiveness tracking for any/all marketing initiatives and programs as well as the associated marketing campaigns. In addition to those benefits, companies experience an increase their marketing process repeat-ability and predictability as well as automation of numerous manual marketing tasks, leading to decreased marketing costs and decreased marketing cycle time.

Advertisements

About StevenJeffes
About Steve Jeffes: Steven Jeffes is a thought leader in developing world-class marketing, digital marketing, e-commerce, corporate innovation, CRM, social media, loyalty, customer loyalty/retention and customer service excellence programs. The recipient of many awards (http://www.stevenjeffes.com/stevenjeffes_awards.html), Steve is expert marketing strategy design & optimization: design, development and launch of world-class and best practice marketing and social media programs; change management organizational design and process excellence in marketing, sales, customer service, engineering, product management; and development of successful sales and sales management programs for Fortune 100 companies and government entities. He holds dual B.B.A. degrees in Computer Science and Finance from Temple University and a Master’s in Organizational Design and Excellence from the University of Pennsylvania/Wharton. Steve can be e-mailed at stevenjeffes@gmail.com or contacted via phone at 518-339-5857.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: