Catalog and Direct Selling: Measure Your Success

How to run and read an ROI analysis

September 2006 By Steve Trollinger

multipage

As a post-mortem tool, ROI analysis answers the question, "What did we get for our money?" and starts the process of establishing the next effort's strategy. After a campaign is complete, ROI analysis should be performed on as many aspects of a mailing as possible, including version tests, offer tests, individual drops and individual segments. Armed with this information, planning for the next effort starts with an understanding of the effects of various offers and versions on various customer and prospect groups and exactly what those variables generate for every marketing dollar spent.

As a decision-making tool, ROI obviously is valuable. If a company can get more for its money by letting it generate interest in a bank account than it can get by investing in a marketing effort, the money should stay put until either a program that will perform better is found or a way to make the existing program perform better by improving costs, increasing average order values or cutting the advertising expense is discovered.

Calculating ROI
Calculating ROI isn't difficult. It starts with a P&L, which most companies would run as a pro forma prior to a campaign and as a final complete after a campaign is executed. A typical cataloger's P&L groups together the merchandise, fulfillment, advertising and overhead components, so key benchmarks can be used to manage costs.

The P&L provides the necessary information for calculating ROI: earnings before interest and taxes divided by advertising costs. In this example, ROI is $100,489 divided by $533,672 or 19 percent. If this cataloger can get better than 19 percent return on its money by leaving it in the bank, it should. Otherwise, this program is successful, and the ROI baseline should be used to compare other potential programs against it in the future.

A pro forma ROI, run prior to the final go/no go decision for a campaign, can be less detailed but should follow the same general guidelines as the P&L version. The chart above is an example of a pro forma that uses projected data, based on historical mailing performance and established corporate benchmarks for costs, to establish the figures for the ROI calculation. Going into the mailing, the company knows that if, for example, the required return on capital is 30 percent, the campaign in question will dramatically exceed that. From here, adjustments can be made in the plan to perhaps mail deeper or more frequently to "water down" the ROI to a point where sales are maximized and profits are minimized down to the required level of return.

As you can see, ROI analysis isn't difficult to do, it just takes a little time to set up the process to run the calculations. Once set, the findings can be powerful. ROI analysis, run correctly, is as likely to find money left on the table as it is to find pet projects that will never be worth the money.

Steve Trollinger is executive vice president at J. Schmid & Associates, Mission, Kan. You can reach him at (913) 236-8988, or via e-mail at stevet@jschmid.com.