Wednesday, 13 January 2010

Understanding Retrun on Investment

Understanding ROI? Hmmmmm...

Why bother? Well most don’t but if you start getting into the habit of looking at your marketing spend and analysing just what it generates you may very quickly realise that you’re facing the wrong way. It can be a serious wakeup call and when applied to the potential returns from online marketing be a “Road to Damascus” moment.We ran an articale at the beginnng of the year about ROI being King and the result was a few emails requesting more information on how best to interparate Return on Investment. So we have tried below to give an insight from our perspective.

The oft raised issue with online marketing is understanding just what you’re paying for when it comes to your website and associated spends. Using a basic ROI calculation may help you understand just a little bit better why diverting your spends towards your online marketing is well worth considering.

Very basically Return On Investment is calculated by working out the returns on your activities against the resources put into achieving those results.

In formula terms ROI % = ((Returns – Investment)/ Investment) x 100

Calculating Returns

Returns on investment should not be based on simple sales but the contribution or Gross Profit figure. Room sales should, for example, include the additional Cost of Goods Sold (COGS) including servicing, commission paid on the sales and other directly related costs.

While many marketers will happily calculate the ROI based on sales only it is not a truthful figure for your business and you should always use the Gross Profit figure. An online marketing campaign aimed at increasing room sales must be calculated on gross profit of those sales not the total sales. Similarly so should any F&B promotion or campaign.

Therefore the figure can more accurately be represented as

Return on Investment = (Gross Profit – Investment)/Investment
Simply divide it by 100 to calculate your percentage

Calculating Investment

For an online marketing campaign for example, the following annual costs should be included in the investment side of the calculation.
  • Website design costs
  • Pay Per Click Costs
  • Emarketing costs
  • Project Management Time
We would suggest that direct cost of the sales is calculated in the returns side of the equation. For instance for a restaurant promotion

Website Design Costs

Obviously include the development costs but ensure to spread the costs over the lifetime of the site. Don’t plan to hold on to your website for more than two years – so spread the costs over the projected lifespan. Include all related costs for maintenance, hosting, email services.

Pay Per Click

Online advertsing costs are easily managed. Set a planned budget for the year but track results. Is it converting to bottom line?

Look at your offline advertising budget and consider matching it (not always appropriate but good starting point – remember ROI!)

Emarketing Costs
  • Licence or fees - £20 - £50 per month?
  • Build in time to write newsletters – 2 hours each?
  • Analysis – 1 hour a month?
Project Management Time

Be realistic and include the time you or a member of your team need to devote to making the project work. In online marketing time is the most precious resource and without allocating it your online projects will fall short
  • Management of direct online availability – Five hours a week?
  • Management of website copy – two hours a week?
  • Management of Blog articles – five hours a week?
  • Facebook and other social Media – five hours a week?
  • Management of Review sites (such as TripAdvisor)and website references – two hours a week?
Only you can look at the time you have for your online marketing costs but whatever you do make sure you use an estimate and don’t discard. To achieve results online someone’s time is required. The website, the social media, the booking engine, the search engines are the vehicles available for your business but you have to take the responsibility of getting behind the wheel and driving the vehicle.

An online marketing campaign without a driver should not be expected to reach your destination on time or on target

Calculation of Return on Investment – Web Campaign
Returns

Estimated Additional Sales
25000
Gross Profit %
85%
Return (Gross Profit) on Additional Sales
21250


Investment

Project Costs
2500
Costs of Time
2500
Total Investment
5000


ROI
3.25
ROI %
325.0%
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