To Measure ROI, Use Gross Profit

Some marketers use sales revenue to measure ROI. But it is much preferable to use gross profit (also called gross margin).

Why? Because if you use gross profit, you will be speaking the conservative language of your CEO and CFO.

Here is a detailed example:

Let’s say you have invested $100,000 in a campaign and you have identified $500,000 in incremental sales that resulted from that campaign. You can prove it from the leads you have tracked. That’s good.

But if you calculate ($500,000 – $100,000) / $100,000 = 4 (an ROI of 400%), you will be overstating your ROI.

You are ignoring the cost of goods sold (COGS), also called “cost of sales.” As the accounting world sees it, your company’s incremental gain from those sales is this:

Revenue – COGS = Gross Profit

So, to talk the language of your CEO and CFO, you need to know the gross margins on the kinds of items sold (which you can probably get from Sales or Accounting). Then, you can make a calculation like this:

Sales revenue ($500,000) minus COGS ($200,000) equals gross profit ($300,000).

Gross Profit minus the Cost of Your Campaign, all divided by the Cost of Your Campaign, equals ROI.

($300,000 – $100,000) / $100,000 = 2

The ROI is 200 percent.

So, whenever you measure ROI, inquire into the COGS. In exceptional cases, such as the sales of services that have no direct costs, you won’t have to figure in any cost. Be guided by what Accounting says.

The closer you stay to the principles and language of Accounting, the more credibility you will have with senior management. The farther away you drift, the more you will be regarded as a “non-player” from a “soft” department. The choice is up to you.

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