Return On Investment (ROI) measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is normally expressed as a percentage or as a financial return per single unit of funds invested (e.g. £1 invested returns £5 in revenue).
In our world of affiliate marketing we typically see advertisers using ROI to measure and compare the success of marketing campaigns. Affiliate Managers work out the revenue received from a campaign, subtracting the marketing costs spent to get that figure, and then divide it by the marketing costs to give the revenue ROI.
Here’s the formula for revenue ROI:
Revenue is vanity, profit is sanity
The phrase “revenue is vanity, profit is sanity” really does apply when measuring the success of a marketing campaign. A campaign with positive revenue ROI might not actually be profitable on the bottom line. Affiliate managers measuring the success of a campaign need to know their gross profit margin to ensure the campaign is actually profitable, using gross profit instead of revenue in their ROI calculations ensures this.
Here’s the formula for profit ROI:
When an affiliate manager understands the gross profit margin, they can measure the profit ROI and the underlying net profitability of a marketing campaign, they can start running much more profitable voucher code offers to consumers.
A small tweak in the percentage discount significantly affects the profit ROI. Offering the customer one percentage point less discount (down 1% from 10% to 9%) leads to a 14% increase in profit ROI! The graph below shows the difference a small reduction in percentage discount can have, from 10% discount through to 1%.
This graph is modelled assuming a purchase being made of an item advertised at £100 before any discounts, that has a 30% gross profit margin and marketing costs of 10% of discounted revenue.
It’s the net profit of a campaign that counts
It’s important to consider the impact that reducing a discount may have on the number of sales and revenue generated, but really it’s the net profit of a campaign that counts when labelling it as a success or not. A reduction in the discount offered may drive less sales and less revenue, but if those sales are at an increased profit ROI then it’s possible and likely that the campaign is generating more net profit overall. It’s about finding that sweet spot where the discount is maximised to incentivise the customer to purchase without compromising overall net profitability.
A handy marketing campaign ROI calculator
I’ve been hunting around the web to find a good ROI calculator but have not been able to find anything, so I thought I would have a go at building one.
Use this calculator to work out the profit ROI of your campaign (and other metrics) and see what difference adjusting the customer’s discount can do to your underlying net profitability.