What’s return on investment (ROI) and why do you need to measure it? Do you have to measure ROI or are there other things that you should measure that are more important? Do people put too much emphasis on ROI? Should you run a marketing program, if you can’t predetermine its ROI? There have been many comments in the news lately suggesting that people put too much focus on ROI and over analyze the numbers. Maybe we put too much focus on ROI. Perhaps there’s a place for intuition and maybe we should start paying attention to it.
Some consider calculating return on investment as a nebulous thing where smoke and mirrors come in to play yet others think we shouldn’t even bother with it. Some say that ROI is just not that important in the big scheme of things. Who’s right? Is ROI an illusion when it comes to marketing and social media? The truth is it’s doubtful that you will get everybody to agree on the subject. Let’s explore return on investment and see if we can find some common ground.
First, what’s ROI? Entrepreneur.com defines ROI as, “the most common profitability ratio. There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets.” Okay, I don’t really see how that applies to marketing, so let’s try another source. Wikipedia.org defines marketing ROI as, “the optimization of marketing spend for the short and long term in support of the brand strategy by building a market model using valid, objective marketing metrics.” There must be a simpler answer out there.
If we take a very simple approach to ROI, we should be able to make it easy to understand. Let’s say you spend $5,000 to run an ad in your local paper with a special code that the customer had to give you so you could track the response. After the ad has run its course, you tally up the sales and find that you sold $30,000 worth of services or products. If you divide what you made, by what you spent, you find that for every dollar you spent, you earned six dollars in return. This means that you generated a 6:1 or 600% return on investment.
Most people would say this was a great return. However, if you calculate your net costs and subtract them from your gross sales, your ROI will change. If you subtract your overhead and cost of goods sold from the total sales, you might find that your profit on these sales totals $9,000. If you divide that by the cost of your ad, you’ll find that your ROI is $1.80 for every dollar you spent or a 180% return on investment. You could also go as far as to deduct the cost of the ad from the profit and that will change things as far as ROI is concerned. If you subtract the cost of the ad from the profits, you have $4,000 in absolute profits. Your ROI is .8 to1 or 80%, and that’s still better than what you get at the bank or in the stock market.
We’ve looked at a couple of ways to measure ROI, but there’s something else to consider about advertising. Advertising is cumulative in affect, meaning that it builds over time. Therefore, even if your results were less than spectacular in your first, second, or third attempts, you’re building capital in the awareness category. Over time and with additional exposure, the cumulative effect continues to build each time you advertise, each time your name is in front of the public and each time your trucks drive down the road, customers become more aware of your company.
If you based all of your decisions off ROI from a single ad, you might incorrectly assume that your ad didn’t generate much profit and was a flop. If you quit at this point, you would probably create a self-fulfilling prophecy, meaning it would fail because you didn’t run the ad again. Sometimes we have to rely on our instinct or intuition; as entrepreneurs, we each have heard that small voice urging us to go in a particular direction or make a choice. We can learn a lot listening to that inner voice called intuition.
Albert Einstein had this to say about intuition. “The mind can proceed only so far upon what it knows and can prove. There comes a point where the mind takes a leap, call it intuition or whatever you will and comes out on a higher plane of knowledge, but can never prove how it got there. All great discoveries have involved such a leap.” I think what Dr. Einstein was trying to tell us is that math and science can only take us so far, you have to listen to your intuition to make those great leaps. Learn to trust your instincts. If you use them, they will develop and grow just like a muscle.
Do we need to measure ROI? The answer to that question is simply yes, but we cannot let it be the driving factor in our businesses. It’s a metric, nothing more. Be aware of it, monitor it and continue to move forward. I give a lot of credence to this intuition thing. Listen to your inner voice the next time you have to make an important decision. Look at the numbers but go with your gut. I think you’ll find you will be much better off.
My website contains links to all the marketing articles I’ve written for the HVAC-Talk Newsletter. If you want your marketing efforts pay big dividends, contact a marketing professional. I’m available to assist you in all of your marketing efforts. If you need a branding consultation, a complete strategic marketing plan, help with marketing strategy, or management services, call or send an email to discuss your needs.
Andy Fracica is president and CEO of Fracica Enterprises, Inc., a consulting firm specializing in marketing, PR, social media, and lead generation strategy. He has over 30 years of sales, marketing, and product management experience in the heating ventilating and air conditioning (HVAC) industry. He concentrates on helping companies deliver their message in an ever increasingly crowded market by teaching businesses to do more with less ($). Contact him at 260-338-4554, firstname.lastname@example.org or visit the Fracica Enterprises, Inc. website.