I want a guarantee on marketing strategies
Very often, business owners ask their marketing team or marketing agency for guarantees of results , following the implementation of a marketing plan or marketing strategy.
This spontaneous question has generated two schools of thought over time:
those who believe they possess "safe" and replicable methods and strategies
those who consider every marketing project "a case unto itself".
We are for the "first time" philosophy , that is, we are convinced that every marketing project requires an approach starting from a reset, without the "mechanical" application of strategies and tools.
We are therefore dubious about the total guarantee formulas promised in the field of marketing consultancy, and in particular about the formula of guaranteed ROI following a marketing strategy.
For this reason we asked Maurizio Zucchi for clarification on what ROI is, and what factors influence it in a company, also in relation to sales (and therefore to the effect of marketing).
What is ROI and what is the ROI formula
ROI ( Return On Investment ) is one of the most frequently used balance sheet indicators in the analysis of corporate profitability. Technically, it is obtained by making the ratio between the operating result and the total net operating invested capital . The numerator is the result of the characteristic management, excluding income and expenses relating to extraordinary management; the denominator is the sum used only in the characteristic investments of the business activity net of the respective depreciation funds and any provisions.
Since it is a ratio between a flow data (numerator) and a stock data (denominator), more correctly, for the stock data, it would be necessary to place the half-sum between the start and end data of the period; this precaution is even more important in the case in which the net invested capital undergoes significant variations during the financial year.
ROI is ultimately a balance sheet index that indicates the profitability and economic efficiency of the characteristic management regardless of the financial sources used: that is, it expresses how much the capital invested in that company yields .
Exogenous factors that influence ROI
In order to judge this index, it must be compared with the average cost of money: if the ROI is lower than the average interest rate on loans (the debt), the remuneration of third-party capital would decrease the overall profitability of the company, i.e. there would be negative financial leverage : borrowing capital would lead to a worsening of the company's accounts. Conversely, if the company's ROI is higher than the cost of borrowed money (the debt), borrowing money and using it in production would lead to an increase in profits and an improvement in accounts.
The ROI analysis can be further explored by breaking down the index into the following factors (below ROI Formula):
OPERATING RESULT SALES REVENUE
ROI = -------------------------------------- x ---------- ------------------------- = ROS
SALES REVENUES INVESTED CAPITAL
where ROS is the return on sales, while ROT is the turnover rate of invested capital.
Sales Relationship
This breakdown of the ROI into its fundamental determinants allows us to evaluate whether the variations in this index are due to a modification of the rate of return on sales (ROS) or whether the rate of turnover of invested capital (ROT) has changed .
The anomaly of this index is that the ROI increases with the simple succession of the financial years and this is due to the fact that the depreciation increases from year to year reducing the accounting base; even if it is expected that the company will implement the necessary actions over time to reintegrate the physiological obsolescence of the assets. Ultimately, therefore, the ROI allows to measure the return of the typical activity of the company.
Bottom line: Marketing ROI cannot be guaranteed because...
...depends on exogenous factors that are not controllable by the company, and even if one were to improperly link it to specific marketing actions, this would be an incomplete hypothesis, and in some ways misleading. The advice is therefore to be wary of the guaranteed ROI formula, because it is in itself a small illusion.
What do you think?
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