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ROI: The Only Number That Matters

By Ken Daniells

Republish: EasyPublish™
Published: 10Apr2008
Word count: 562
Viewed: 275 time(s)

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Have you gotten bogged down with numbers that don't matter?

The success of your direct mail campaign is ultimately measured, not by bounce-backs or number of responses, but by one simple number: your return on investment (ROI). As the owner of your business, you must know this number for every marketing campaign you run.

You may believe every campaign number is important--list size, bounce-backs, leads generated, number of responses, number of appointments, and number of sales. At the end of the day, there's only one number that can tell you if your campaign was a success or a failure.

This might sound unrealistic; you may wonder if you can really judge an entire campaign based on one number. To illustrate this reality, we'll examine two real-world examples, and then we'll look at how you can measure ROI for yourself.

Let's start by taking a look at two very different campaigns. As we go through them, decide, if you were the business owner in each, would you consider the campaign a success?

* Lots of sales, small profit each. In our first example, Jon sells a paperback book. He sells copies at a $2 profit. He sent out 10,000 postcards at a cost of $3700. As a result of that campaign, he sold 1500 books which is a 15% response rate. But because his profit on each book is only $2, he actually lost $700 on the campaign.

* Few sales, big profit each. Peter offers home mortgage services. His average income per new home mortgage is $5000. He sent out 30,000 postcards at a cost of $9800. As a result of that campaign, he closed five additional home mortgages which is a paltry 0.001% response rate. However, because his profit on each home mortgage is $5000, he actually profited $15,200 after his campaign costs.

If you were Jon, you might have considered the campaign a success because of the high response rate. Knowing what you know now about the actual dollar value of the campaign, though, do you think Jon should repeat the mailing?

Commonly, business owners make the mistake of judging a campaign based on the response rate, instead of the profit involved. And if Peter were to make that same mistake, he would miss out on repeating his $15,200 success.

Now that you understand the importance of looking at your ROI as opposed to focusing on the other campaign numbers, let's walk through the process of the actual calculation. Don't worry, it's not nearly as complicated as it might sound.

1. Get out your numbers. Gather your numbers from your last postcard campaign. Because this is a new formula for you, you may not have every number you'll need and may need to estimate some of them.

2. Fill in the blanks. Using BOOM! Ink's online calculator or this formula, plug in the numbers from your last campaign.

* ([Average profit per sale] * [Number of sales from campaign]) - [Campaign expenses] = [Profit] * ([Average profit per sale] * [Number of sales from campaign])/[Campaign expenses] = [ROI %]

Armed with your ROI from your most recent campaigns, you'll be able to make smart decisions about which campaigns are worth repeating and which are ready for retirement. Keep this formula in mind and you'll watch future campaigns flourish.

Make good use of what you know about ROI to BOOM your business!

Ken Daniells helps business owners and organizations to increase income and profits using practical, but often overlooked marketing basics. He is the founder of BOOM! Ink, a marketing company dedicated to helping small business owners market effectively and grow. For more free articles, tips and advice, visit http://www.boomink.com/welcome.htm.

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