Do You Know Your ROAI?

Submitted by: Sarah Day - Founder, Managing Director

In order to determine the effectiveness of your advertising, it’s important to evaluate your Return On Advertising Investment (ROAI).

Response vs. Return.
When we advertise, we tend to assess success by response, and we can get hung up on how many hits our website received or how much our foot traffic increased. But before you judge your advertising success or failure in terms of response, take some time to evaluate it in terms of return. How much money did your ad campaign bring in?

Calculate Your ROAI Based On Return.
Before you begin a new advertisement campaign, evaluate your gross and net sales. After the campaign you’ll need to determine the increase in sales that resulted from your campaign. To calculate your ROAI, take that gross sales figure, subtract the cost of goods or services, and divide this net profit by the cost of the campaign.

What’s A Good ROAI?
A whole number is good, and the larger, the better. If your ROAI is 1.00, then you’re breaking even. For every dollar you spent, you got one back. If you have an ROAI of 2.0, you got back your investment and earned a dollar for each one spent. It may not seem like much, but you’ve shown a 200% return on your advertising investment.

Now Factor In the Respone To Your Campaign.
Now that you have your ROAI, take a look at your response rate. How many customers responded to the advertisement campaign? A ten percent improvement can increase your ROAI by ten percent. If you usually get 100 potential customers coming into your shop during a week, and during the campaign you averaged 110, then your ROAI of 2.0 increases to 2.1.

Improve Your ROAI.
Once you know what your ROAI is for various ad campaigns, analyze the results and use this information to improve future results. Which campaign earned a better ROAI? Is the increase due to media, demographics, advertising style or message, or something else? Could you increase returns from future campaigns by creating a more targeted offer, promoting a specific service or product, conducting more frequent campaigns, mailing a followup letter, adjusting your timing, using a different media mix, or by using a specific marketing method? You can use the ROAI calculation to compare and fine-tune marketing strategies and to gauge the profitability of different products and services. 

Why can judging the success of an advertising campaign by response alone be deceiving?
Gauging response is a good way to get a pulse on your business, but tracking that alone can be deceiving. Let’s say you sent out a direct mail to 500 clients the previous month and had a response rate of 50, and ten made purchases of $100 each. You make a few changes the following month and send another direct mail piece to 500 clients and have a response rate of 25, but 20 make a purchase of $100 each. Evaluated solely on response, you might think your second advertisement failed, when actually it was more profitable.

Sarah Day is the founder and managing director of Day One Business Services, a general management consultancy for small to medium sized businesses. Every day Sarah helps guide small enterprises through the process of change - whether that be through the start up process, rapid business growth or a turnaround situation. She does this using a wealth of management experience gathered during a twenty-year career managing a variety of functions in both small businesses and large corporations.

Sarah holds a BA from Marquette University and an MBA in Marketing from the University of Minnesota. She is also an accredited executive associate of the Institute for Independent Business, a nonprofit research, training, and accreditation organization established in 1984 to give independent businesses direct access to top management advice. She continues to work with a variety of small businesses on resolving their key issues and sits on the board of a local non-profit agency.

Sarah DayDay One Business Services
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