I have a client that was questioning their current marketing budget. They were spending a lot of money to market and promote products but they had no way of determining the success of the spending. Marketing can be expensive, and understanding and being able to quantify how much it benefits the company can be critical to the long term success of a business. Many small businesses simply throw money into the marketing budget and hope that it is working, but they are unable to see the value or measure the increase in sales revenue. In most cases, there are metrics that can be used and often a simple Return on Investment (“ROI”) calculation can provide data on the success of the marketing. Obviously some types of marketing can be easier to gauge than others as the returns can be more easily tracked with coupons and specific products than with other forms of television, radio, print, and sponsorship advertising.
A simple ROI calculation would be sufficient to measure the success of many marketing campaigns:
ROI% = ((Benefits – Costs)/Costs) X 100
ROI% = ((Incremental Revenue) / Investment Expense) x 100
This formula provides the percentage return on every dollar spent on the advertising campaign. As you might imagine, the difficulty lies in collecting the data to perform this analysis. In a company that is spending on multiple marketing campaigns it can often be difficult to determine where one campaign’s success begins and the others’ successes end. Marketing and Advertising (“M&A”) may benefit multiple products, the entire company, or even the entire industry. While the costs or investment in marketing may be very clear and easy to calculate, the benefits (returns) directly related to that campaign may be difficult, if not impossible, to determine. The company may see some positive increase in sales returns during the time of increased M&A spending but it may paint an incomplete picture, as the increased revenues could be a result of a variety of other industry and market factors as well as a company’s other M&A spending. While incomplete, the analysis can still be beneficial in providing some assurance of marketing’s success.
There are other variations on traditional ROI including Return on Marketing Investment (“ROMI”), but the overall goal to all return analytics is to measure the degree to which marketing dollars contribute to profit. Marketing and all departments are under constant pressure to prove their worth and to show that spending is producing positive end results. When you manage a business you must consider the return on investment to determine what is working and what is not working, focusing your limited dollars on what does work to drive sales revenue and business success.
The challenge with ROI analysis is that it can be hard to determine how much you did make in return. The company most likely already had some sort of return (“base return”) and the goal of M&A is to increase that revenue. The “incremental” return can only be calculated if a company can monitor and report on its revenues with accuracy and confidence prior to the M&A spending increase. This is where timely, accurate and complete accounting can be beneficial in making analytics meaningful and productive for all companies. TGG Accounting can help your company improve its accounting and perform these analytical procedures to ensure business success.Written by: Brian O’Connor TGG Accounting