I spoke about the importance of creating positive marketing messages in a prior post about engagement marketing but it bears repeating.  At our core we are social creatures and we are attracted to people, events, products, services, and brands that help us to have fun. The reason that social media is such a huge hit is because it helps us to connect with others so we can share fun.  It’s so simple, yet so profound.  This simple truth creates infinite possibilities to increase your marketing ROI.

First of all, what is “fun?”  Fun isn’t just fun, it’s hope.  Fun can be found in magnifying the things you love in what you do everyday.  It can transform the annoyances you face into positive challenges to help others.  It is fun to see the results of your hard work in your personal growth and in your career.  It is fun to use your success to turn around and help someone else get further in their life.  It is fun to work in a team to pull together to see something accomplished.

Think for a minute about the products or services that you or your company are promoting.  Some of us may be lucky enough to work for a company whose mission is to help people have fun, such as film, gaming or social media.  Others of us have to search a bit harder to determine the fun that we provide to other people.  However, if you take the time to do this exercise it can transform the way you market yourself and your company’s products and services.

I offer, as example, my own situation to explain my thinking. What I promote to the business world is custom market research services on behalf of C.A. Walker Research Solutions.  On face value it doesn’t seem like I’m selling anything particularly fun, but to me it is great fun!

First of all, I find it fun to build relationships either online or in-person and to discover people’s current business objectives.  I am a natural problem-solver.  I enjoy delving into different business worlds to understand perspectives and pain points, so I can determine precisely how we may contribute to others’ success by applying custom research, thus creating more fun in their life.  It’s also fun to think through with people if there is anything we can do together to offer markets a service that is stronger than either of us could separately.

I find it fun to analyze potential markets and figure out fresh ways to make relevant the various types of research that we’ve been doing for more than 30 years.  It is fun to then use that information to prepare marketing messages that appeal to people’s sense of fun; at least to be interesting!  It’s fun to post applicable articles to my LinkedIn groups, which I also may use to explain some of what we do, and to meet new people who seek me out because they appreciate what I’ve shared.

On a personal level, it’s fun to me to represent a company that I firmly believe in.  I’ve worked in a variety of companies over the years, but never before have I worked with such a terrific group of people.  It’s a joy to me to get up each day and go to work to spread the tale of C.A. Walker.  We are in a “sweet spot” in this rough economy as far as our size (25 people), the value that we offer, and our consistent focus on client service.  And to add to my point about the importance of having fun, I work with a bunch of comedians.  We’re all the time joking and kidding with one another, while always making sure all is well with our projects.  I love it!

It’s fun to study what marketing ROI means and how businesses are working to apply it.  It’s fun to build my personal brand, Marketing ROI or DIE!  It’s especially fun to read when people respond to my posts that it’s helped them in some way. It’s fun to use Twitter (@MktgROIorDIE) to spread what I’m learning and to make new connections, such as when I attended the Licensing Expo in Vegas recently.  I met some really great people through the use of the #licexpo hash tag who I look forward to working with!

So whatever it is you do, rediscover your sense of fun in it.  Think through how you are helping others have fun in their lives, and utilize that in your marketing to increase your ROI.  Most importantly, laugh daily and find people to laugh with you.  It’s hard to laugh alone!

I read an interview today with Merry Elrick, author of the book “What’s the Truth about B2B Marketing ROI?” who says the following:

“Marketing ROI is NOT an increase in market share, click-throughs to your web site or even revenue generated from your marketing communications. Marketers must understand the literal definition as the rest of the world does, including everyone in the C-suite. ROI is the profits generated over and above the initial investment and expressed as a percent of the investment. There’s a formula, but you really need to understand the nuances of how ROI is calculated in your company because there are multiple ways to interpret concepts like gross margin, net present value or discount rate, just for starters. You need to know your own company’s standards.”

GROSS PROFIT MARGIN

From About: The Gross Profit Margin is a measurement of a company’s manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient.

From InvestorWords: Gross Profit Margins reveal how much a company earns taking into consideration the costs that it incurs for producing its products and/or services.

It can be expressed in absolute terms:

Gross Profit = Revenue − Cost of Sales

$89,250.00 = $109,250.00 – $20,000

Gross margin is expressed in the form of a percentage:

Gross Margin % = Gross Profit / Revenue

81.69% = $89,250.00 / $109,250.00

Note: Gross Margins of 82% rarely exist.  The example does not take into consideration costs that are continually increasing to pay for overhead and marketing, thus lowering Gross Profit Margin.

As example, a company makes 100 widgets in their first year and sells them for $1,000 each.  With tax of 9.25% the Revenue or Net Sales is $109,250.00, which is the amount generated after the deduction of returns, allowances for damaged or missing goods, any discounts allowed, freight, and any other expenses (in this case, $0).

The Cost of Sales or Cost of Goods Sold (COGS) is $200 each or $20,000.  COGS is the beginning inventory, in this case $0, plus the Cost of Goods Purchased during some period, $20,000, minus the ending inventory, $0, in this case. Gross Profit or Gross Income then is $89,250.00.

RETURN ON INVESTMENT

Now that we have the Gross Margin, we can generate the ROI in the first year (it typically is done on an annual basis).

ROI = ((Revenue – Expenses*) / Investment)

*namely, business, depreciation, interest, and taxes

To get the figure in percentage format, multiply ROI by 100%.

To further the example, when the company went into the widget-making business, they spent $5,000 as their initial investment in setup costs, plus $200 for every widget produced ($20,000), plus $9,250 in taxes.  On a sale of 1,000 widgets their ROI is 300%

300% = ($109,250.00 – $34,250) / $25,000

It would be wise to calculate how many widgets they had to sell at pre-tax $1,000 to break even.  According to my calculations, when they sold widget #22 they broke even on their current plus future investments.

Furthermore, the investment of $25,000 is likely a loan.  If the company borrowed this amount on a 3 year plan at a rate of 20%, by my calculations it would cost them $33,447.24 if compounded annually.  Monthly payments, therefore, would be $929.09. As we are just talking about the first year of operations, the first year amount due would be $11,149.08 with the remaining $32,050.92 due in years 2 and 3.  Total first year expenses also increase by $2,815.75, which is one third the total interest: $33,447.24 – $25,000 = $8,447.24

Realized Gross Profit (first year): $78,100.92 = $89,250.00 – $11,149.08

Realized Gross Margin (first year): 71.48% = $78,100.92 / $109,250.00

Realized ROI (first year):  289% = ($109,250.00 – $37,065.75) / $25,000

From these results, we can conclude that it would not be a bad investment.  However, as more and more details of the reality of costs are added into the equation, profit, margin and ROI will all decrease.

NET PRESENT VALUE

The good business person will then decide if making widgets has the best ROI for the outlay of $25,000 or if some other opportunity – including an investment in financial markets – may yield a higher return.  To evaluate this, calculate the Net Present Value, which takes a look at the current value and timing of cash flows, comparing it to the discount rate – the rate of return that could be earned in the financial markets – currently 0.75% as of September 20, 2009.  Another name for discount rate is the IRR rate (Internal Rate of Return).

SUMMARY

When we talk about marketing ROI we’re often looking at things like the results of a campaign (purchases, new subscribers, click-throughs), but we have to keep in mind that those results roll up into the real ROI, which calculates return on an overall investment.  To do this, we have to calculate three things: Gross Profit, Gross Profit Margin, and ROI.

Gross Profit = Total Revenue minus Cost of Sales or Cost of Goods Sold, which is inventory plus the Cost of Goods Purchased during some period minus the ending inventory.

Gross Profit Margin % = Gross Profit divided by Revenue or Net Sales, which is the amount generated after the deduction of returns, allowances for damaged or missing goods, any discounts allowed, freight, and any other expenses.

ROI = Total Revenue minus Total Expenses, divided by the Total Investment.  The result can be calculated across different scenarios and it can then be decided where the investment can be best spent, taking into consideration the Net Present Value of the differing cash flows that are created.