Marketing ROI Calculator – Passing the Stupid Test

I once arrived at an organization and one of the first things to cross my desk was a $16,000 contract for advertising in a magazine.  Being the geek that I am, I tend to favor more modern channels, but also being the nerd that I am, I wasn’t going to make the decision based in my own bias.  Without any experience in the organization, I wanted to make the best decision I could.  I looked at the ads that had been placed over the previous year and they were all promoting only one of the company’s product lines.  I quickly called the product line manager to find out how much that product did in sales in one year.   I then ran this simple calculation:

SN = (I*(1+D))/M

Where:

• SN = Sales Needed
• I = Investment (or ad spend)
• D = Desired ROI as decimal (25% = 0.25)
• M = Product markup as decimal (20% = 0.2)

So, in my example, I plugged the $16,000, the desired ROI for the marketing campaign of 25% and the mark up of the product, 20%:

(16000*(1+0.25))/0.2

The answer that popped out was $100,000.  That means that to hit the desired return on marketing investment, this ad needed to generate at least $100,000 in sales.  Given this product line had only $300,000 in sales and this magazine was on the fringes of the market area, this ad had no chance of being responsible for its fair share of the past year’s sales.  In short, this didn’t pass the stupid test.

I put this in a quick online potential marketing ROI calculator.

This isn’t an exact measure, only a simple test for extremes.  Since then, I’ve used that calculation for many potential campaigns.  Of course, it can be impossible to exactly predict the outcome of any given effort, but we can plug in the numbers to see what is needed.    This has been particularly helpful in fending off over-priced snake oil sales folks.  I get calls all the time for directory ads, web banners, or other potential investments.  By plugging in the numbers, I can see if these ideas have any chance of passing the stupid test.