Calculating Advertising ROI

In our previous blog, we used ROI calculations as a tool to prepare an objectives-based budget. Today, we will discuss how ROI calculations should be used to determine if your advertising efforts resulted in the incremental growth of your organization’s profits.

One of the leading experts in this field of marketing ROI is James D. Lenskold, who literally wrote the book, “Marketing ROI”. You can find many useful tips regarding marketing ROI on his website www.lenskold.com .

According to Lenskold, the key to calculating ROI is to focus on profits, not gross sales revenue. In other words, how much are you willing to invest to secure incremental profits? This idea seems like a “no-brainer”, but Lenskold outlines many of the common obstacles that exist in organizations that prevent the application of this approach.

In its most simplistic and fundamental form, Lenskold’s equation for calculating ROI is:

Gross Profit Margin – Advertising Costs / Advertising Costs

Here, the organization takes the gross profit margin (or profit before the marketing costs are taken into consideration), subtracts the advertising costs, and then divides that value by the advertising costs. The result is a percentage return, much like financial investments may produce a return.

For example, if an organization’s “gross profit margin” is $750,000 and their advertising cost was $500,000, the resulting ROI is 50%:

$750,000 - $500,000 / $500,000 = 50%

What is the “correct” ROI level? Well, that becomes a management prerogative based on the business, industry and market conditions.

With his book, Lenskold explores some very complex variations of this equation and other consideration, such net present value, lifetime value of a customer, cross-selling current customers, and so forth. However, the book is a useful guide to determine how best to calculate marketing ROI within your organization.

If you are looking to move your organization to a more measurable approach with your marketing efforts, I recommend you check out Lenskold’s website and begin to transition your marketing budget from an expense to an investment within your organization.

For more information on measurable marketing, or other strategy-based advertising applications, contact DMC Advertising at (262) 523-2000. We are specialists at targeted and measurable marketing programs.