Another one of our favourite questions which seems to come up on regular basis is the Marketing ROI… how to get it, calculate it, increase it etc…
Let’s start with the good old marketing maxim, attributed to Mr. John Wanamaker (American business man from late 1800s): “Half the money I spend on marketing is wasted; the trouble is I don’t know which half.”
This is great, but it does not get us any closer to our answer on the marketing ROI question. So instead let’s look at this simple tool which is one of the many similar tools from our Parcus Group product management software platform.
Let’s have a look at the following as an illustration of a case where despite higher levels of gross margin, certain products may indeed generate lower marketing ROIs.
Let’s explain all the inputs.
In the first section all the yellow input fields are straight forward, market demand, product sell prices, expected unit sales from this campaign for example etc…
In the margin section enter the expected product gross margin as a %.
And finally enter the marketing expenses expectation as $…
The formulas are simple and will work our the rest but for the curious souls it works like this:
- Gross margin in $ is simply Sales Revenue times (x) Gross Margin %
- Net Marketing Contribution is simply Gross Margin $ less (-) Marketing Expenses $
- And finally the formula for how to calculate Marketing ROI in this context is: Marketing ROI = (Net Marketing Contribution / Marketing Expenses ) x 100%
Result: while at the gross margin level the Product 1 is yielding the best gross margins, at the marketing ROI return level, Product 3 generates the best returns on marketing funds employed.
In this situation, if a marketing manager had for example a limited budget and needed to make the best possible return on it, some sort of Product 3 campaign may be the best bet.
So, a very neat and easy tool to use and we hope you like it.