Return on Investment (ROI)
When I think about advertising, the number one Key Performance Indicator (KPI) I look at is: Return On Investment (ROI).
How much money is coming in per dollar spent on advertising?
This is simple to find out. Take what you spend on advertising in a given period and divide it by the sales for that same period.
I like to drill down and get more specific by taking the cost spent on each advertising avenue, and dividing it by the revenue generated by that specific avenue.
For example: Advertising with Valpak
I’ve been using Valpak since I opened for business.
Let’s say it costs me $250 / month to send a coupon in the mail to 10,000 homes in the surrounding area.
Anytime a coupon comes in, everyone on my team knows to staple it to the corresponding sales ticket. That way, at the end of the month, I can separate my discounted sales by which type of coupon was used. For Valpak, we’ve been averaging $450 / month in sales.
The standard ROI calculation is: ((Total Revenue – Cost of Investment) / (Cost of Investment)) x 100
My total ROI is ((450-250) / (250)) x 100 = 80%. Pretty good stuff, right?
Well… Let’s take it one step further and consider Cost of Goods Sold (COGS).
The new ROI calculation looks like this: ((Gross Profit – Cost of Investment) / (Cost of Investment)) x 100.
Total Revenue $450
COGS: 30% or $135
Gross Profit: ($450 – $135) = $315.
ROI: ((315-250) / (250)) x 100 = 26%.
Significantly lower than the 80% mentioned before, but a positive ROI nonetheless.
Doing this monthly calculation allows me to know whether or not this advertising method works.
My break-even point on Valpak is a Gross Profit of $250. Or $357 in Total Revenue.
How did I calculate that? Simple: ($250 Gross Profit) / 70% = $357 in Total Revenue. COGS in this case would be $107 or 30% of 357.
Find what works and repeat.
Once you identify positive ROI in a certain marketing avenue all you have to do is keep feeding the machine.
You also want to be sure you don’t get lazy. Make sure you identify your break-even point and monitor your ROI on a regular basis.
A marketing strategy that starts out strong can have leave a lasting impression.
If you go months without monitoring your ROI, you might be surprised to find out what was once a hit is now just a big fat turd stinking up your income statement.