Does this sound familiar? Probably! We can't help you stem the constant bombardment of sales calls and emails, but we can help you determine if your advertising is effective by taking a more scientific and analytic approach.
Return on Investment (ROI)
Everyone has come across ROI at some point, but what is it exactly? ROI is the most basic of all methods to measure marketing return. Simply put, it is the gross revenue generated by any advertisement, expressed as a percentage of the ad's cost. ROI must be greater than 100% and ideally is north of 500%. To determine ROI, you need to be able to quantify the results of your ad - there are many ways to do this - but it is critical. Once you determine how much revenue was generated, you simply subtract the ad's cost and then divide by the ad's cost, and viola - ROI!
Establishing and ROI Benchmark
ROI is a great metric to get an idea of your ad's effectiveness, but it leaves some information out. First and foremost, to establish an ROI benchmark, you must consider the cost of producing the revenue. Should you be shooting for the same ROI on an ad promoting happy hour tee times as you would for one promoting happy hour drinks? NO! Those products are vastly different and have vastly different incremental costs to your business. The 6:30 p.m. tee time has almost no incremental cost while that 20 oz beer is going to cost you about $1.50.
It is important to look at each product at your course differently when calculating your ROI benchmarks. Next, let's talk about Net ROI and work through a couple of examples.
Taking ROI a step further by factoring the cost of products will give you a much better understanding of your advertising success. To do this, simply replace gross revenue in the traditional calculation with net income from the same products.
Let's work through a couple of practical examples to illustrate the utility of nROI. Let's use two identical campaigns - both had an ad spend of $1,000 and gross revenue of $3,000. One campaign promoted happy hour tee times while the other promoted happy hour specials in the grille. The first step in both calculations is to determine net income.
To determine the net income of a tee time, first, we must understand what incremental costs are associated with putting an additional golfer on the course. News Flash! There are almost no incremental costs here because the cost of keeping the course in good shape and staffed for golfers are virtually fixed. We'll build in some "fluff" and use a net profit percentage of 90% here. So we'll plug our numbers into the formula below.
This example yields an nROI of 170% - meaning this campaign generated $1.70 in net income for each ad dollar spent - not bad at all.
Now let's move on to the happy hour promotion. What is the variable cost for F&B sales items? Far more than golf - generally the cost of goods for F&B items are around 30%, as is the labor cost associated the creating the item. Combining COGs and Labor yields an incremental cost of 60% for each item, or 40% to net income. Let's plug those numbers into our formula:
This example produces an nROI of 20%. This campaign was not worth the effort.
As you can see, measuring the return on your marketing investments can be tricky, tedious, even impossible without the right tracking in place. The calculations outlined here can become infinitely more complex, but ROI and nROI are a great place to start. In a future blog post, we'll discuss CPA and LTV. Not sure what those are? Subscribe to our email list, and we'll make sure to deliver great content (and no spam) to you every month.