With so many different ways to advertise and market your small business, determining the most effective option is important. Measuring your return on investment, or ROI, will give you an idea what effect your advertising and marketing efforts are having on your profitability.
Put simply, ROI is the money you earned divided by what you spent trying to earn that money. To calculate ROI you divide your net profit by your net investment then multiply the result by 100 to convert to a percentage. The higher the percentage, the better your ROI. Your net profit is the income you earned after subtracting all expenses and losses. Your net investment is the money you spent on advertising and marketing.
For example, over summer a lawn mowing business earns a net profit of $775. During this period the business spent $1525 on flyers, newspaper ads and some online marketing. After dividing the investment into the profit, the ROI for the summer period is 51%. With these results you would expect the business to keep utilising these marketing activities.
Use ROI to guide your marketing
By regularly measuring your ROI you can gauge the effectiveness of all your marketing. You’ll be able to focus on the successful strategies while cancelling the ones which don’t offer you a decent return. Studying previous ROI results means you’ll make better business decisions for your future. With limited funds available for marketing it’s important to take ROI into consideration so you only invest in profitable marketing.
Calculating ROI should be part of any marketing campaign your business undertakes. If you decide on direct mail advertising include a promotional code which the customer has to quote when they place an order online or over the phone. You’ll be able determine how many sales were a result of the mail advertising. Divide the profit by the cost of printing and you’ll have your ROI.
If you’re running different advertising campaigns, e.g. local newspaper ads and online banner ads, measure the ROI of each separately. This will show which approach is the most successful. Stick with the advertising offering your business the highest ROI.