ROI Model - The Profit Power of Referral Sales
Money gained or lost on an investment relative to the amount of money invested is the ratio Return On Investment or sometimes just return.
Interactively comparing ROI between different marketing campaigns is an effective way to maximize the profit generated by a marketing program.
The investment we are referring to here is the cost of your marketing campaign, which is aimed at increasing sales.
ROI is also known as rate of profit and does not normally indicate how long an investment should be held, although it is most often stated as an annual rate of return for convenience and a reference.
For our purpose we will make the time period the duration of your marketing campaign, which could be days, weeks or months.
Your budget is your starting point.
The key inputs to the ROI model are your budget, the potential clients your marketing strategy generates and your closing rate i.
e.
the number of prospects converted into customers, which is important to know because it gives you your sales.
Dividing the budget by the number of potential clients who responded gives you the cost per lead How good your sales skills are determines how many potential sales you close, determined from the potential clients who responded.
Then when you divide the budget by the number of potential sales you closed gives you the cost per successful lead, which you need to calculate ROI.
Take your gross profit and deduct the marketing cost, to give you your net sales i.
e.
money you generate from your sales campaign less the marketing expense, which when divided by your marketing budget (equivalent to the investment) gives you your ROI.
You are simply comparing the revenue you generated to the money you spent to make it happen.
The basic equation is ROI = (total net profit - campaign cost)/campaign cost If ROI is negative money is lost, so you want it to be very positive! ROI can be used to compare different marketing campaigns: for example referral sales on the one hand to the ROI for a traditional campaign employing email, direct mail and telemarketing on the other hand.
ROI clearly shows how two marketing approaches differ.
The model may at first appear daunting, however it is easy and there are accompanying notes to help you work through the application of ROI; I suggest printing them out as a guide.
Simply plugging in values for variables shows you how the campaign cost per successful lead and ROI values change.
Interactively comparing ROI between different marketing campaigns is an effective way to maximize the profit generated by a marketing program.
The investment we are referring to here is the cost of your marketing campaign, which is aimed at increasing sales.
ROI is also known as rate of profit and does not normally indicate how long an investment should be held, although it is most often stated as an annual rate of return for convenience and a reference.
For our purpose we will make the time period the duration of your marketing campaign, which could be days, weeks or months.
Your budget is your starting point.
The key inputs to the ROI model are your budget, the potential clients your marketing strategy generates and your closing rate i.
e.
the number of prospects converted into customers, which is important to know because it gives you your sales.
Dividing the budget by the number of potential clients who responded gives you the cost per lead How good your sales skills are determines how many potential sales you close, determined from the potential clients who responded.
Then when you divide the budget by the number of potential sales you closed gives you the cost per successful lead, which you need to calculate ROI.
Take your gross profit and deduct the marketing cost, to give you your net sales i.
e.
money you generate from your sales campaign less the marketing expense, which when divided by your marketing budget (equivalent to the investment) gives you your ROI.
You are simply comparing the revenue you generated to the money you spent to make it happen.
The basic equation is ROI = (total net profit - campaign cost)/campaign cost If ROI is negative money is lost, so you want it to be very positive! ROI can be used to compare different marketing campaigns: for example referral sales on the one hand to the ROI for a traditional campaign employing email, direct mail and telemarketing on the other hand.
ROI clearly shows how two marketing approaches differ.
The model may at first appear daunting, however it is easy and there are accompanying notes to help you work through the application of ROI; I suggest printing them out as a guide.
Simply plugging in values for variables shows you how the campaign cost per successful lead and ROI values change.
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