How to Track Return on Investment

Why Track Return on Investment (ROI)

As a small business owner, you want to know when you advertise if it is working.

How do you define if it is working? If it pays for itself.

A metric to use to see if an ad is paying for itself is “Return on Investment”.

Many small business owners are more focused on “Response Rate”. The way you define the success of an ad, is not by the percentage of response, rather by how much revenue the ad produces compared to the amount you spent to get it out.

Knowing your Return on Investment allows you to:

  • Focus your advertising dollars on advertising mediums that bring you the highest return
  • No longer advertise in mediums that are negative
  • Build a library of advertisements that you can use for future advertisements
  • No longer guess at what will work

How to determine Response

Your ad should have a method to determine “response” from the customer. The easiest way to measure that response is with a coupon. Having the customer bring in a coupon or mention a coupon when shopping at the store or calling you.

When customers bring in the ad, your staff should be instructed to either attach a copy of the receipt or write on the back of the ad the amount of money the customer spent. They should then place them in a box or special collection point.

At the end of the advertising period (another reason for expiration dates), collect all of the redeemed coupons. Add up the sales generated. Review this number with how much you spent on advertising.

How to calculate Return on Investment

Average Profit per sale – How much you make on each sale.

For example, your average sale is $100 worth of merchandise to a customer that is your sale amount. Those products cost you $50 with shipping and handling, your gross profit is $50.

$100 Sale Amount – $50 Cost of Goods = $50 Gross Profit per Sale

To get the ROI percentage

Divide the Gross Profit/Sale Amount

$50 Gross Profit/$100 Sale Amount = 50% Return on Investment

Number of Sales needed to break even:

Cost of the ad is $500

Sales needed to cover cost of ad with profit

$500 Cost of the ad/$50 Gross Profit per Sale = 10 sales

Calculating ROI with Discount

Chances are you are going to put in a coupon and providing an incentive to the customer in the form of a discount. Here is how to calculate the sales needed with the discount.

If you were to offer a 20% off coupon, then your

$80 Sale Amount ($100 Less 20%) – $50 Cost of Goods = $30 Gross Profit

Cost of the ad is $500

Sales needed to cover cost of ad with profit

$500 Cost of the ad/$30 Gross Profit per Sale = 16.7 sales

How do you get these numbers?

Your Point of Sale system is going to be your best friend. Or your accountant. Look at past invoices and see what your average cost is and what you sell it for

Bonus Tip:

Get yourself a big binder. Place a copy of the ad in the binder along with the results. This is a good way for you to go back and determine which ads to run in the future.