Catalog and Direct Selling: Measure Your Success
If the company's ROI requirement is 25 percent and the pro forma analysis suggests an expected ROI of 50 percent, this may indicate the mailing can go deeper into the housefile or can be mailed to more prospects. It's also important to perform the ROI analysis to establish campaign expectations against which the final results of a campaign can be measured.
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 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.