There’s an old business adage that goes like this: “You’re wasting half of your marketing dollars. Unfortunately, you don’t know which half.” What was true fifty years ago at the height of the print and radio advertising market is also true today in the digital age. Small advertisers on limited budgets can’t compete dollar-for-dollar with large, media savvy, companies like UPS, Nike and Apple who can afford to produce and run new multi-million dollar advertisements over and over again until they find something that works. Every dollar a small business spends on advertising has to translate directly into profit, or it just doesn’t work.
Figuring out how to make every dollar count means calculating your marketing’s return on investment (ROI). ROI is a ratio of the money gained relative to the amount of money invested. Think of it this way:
Your company repairs widgets for $100 each. You place an advertisement in the newspaper for $500. How many new widget repair jobs do you need from the advertisement to break even? Five. But, breaking even is just another way of saying that you made a 0% return on your investment. To make a even higher ROI, you’ll need to sell more than five.
One simple formula for figuring out ROI is (Final Value – Initial Value) / Initial Value. So using our example, let’s say you sell six widget repairs for $600 from your $500 ad, the formula would look like this:
($600 – $500) / $500 = 0.2 or a 20% ROI.
So selling six would give you an ROI of 20%. What about if you only sold 4?
($400 – $500) / $500 = -0.2 or -20% ROI
Using this simple formula, you can directly compare different kinds of marketing even if the numbers don’t match up.
Let’s say that instead of selling widget repairs in a newspaper advertisement, you decide to purchase an ad on the radio for new widgets. Each widget sells for $500 and the radio ad is $750.
Obviously, if you sell only one, you’re going to lose money. But, if you sell two:
($1000 – $750) / $750 = 0.33 or 33% ROI
Since a 33% ROI is better than a 20% ROI you now know which plan was better and can compare your different marketing directly instead of attempting to make apples-to-oranges comparisons.
Comic by Bill Hood.