1. Review Dr. Thomas Burnham’s Presentation Ted Mitchell

2. More on Marketing ROI MKT 316 Class March 23, 2015

3. Accounting, Finance, Marketing How does accounting report profitability of an investment that generates revenues over time? Allocate the cost of the investment from time zero and try to match sunk costs with revenues over time (depreciation) How does finance treat an investment in capital (a revenue producing asset)? Profit = (Present Value of cash flows) – Cost of Investment Hold the cost of the investment at time zero then fold back the future cash revenues and expenses with time value of money to determine the net present value of the the investment (net profit in today’s dollars How does Marketing treat an investment in operating capital? Marketing profit Z, = ROMI x Investment, I Invest in a marketing strategy, 4 P’s, and you make a commitment to this strategy in time zero. All the future marketing expenses which you committed to regardless of when they occur are held to be sunk at time zero. All the future revenues which are generated by these expenses are minus the cost of those expenses are the profits from the investment. All can be pulled back as present values

4. ROI: Return on Investment ROI = (Return – Investment) / (Investment) Spend $1,000. Get $1,500 back. ROI? 50% Spend $1,000,000. Get $1,500,000 back. ROI? 50%

5. Profit has a quadratic relationship to Investments Gross Profit s $1,00 0’s Investment $ (or Effort) 1 $50 0 2 3 4 5 6 7 $1,0 00 $1,5 00 $2,0 00 $2,5 00 $0 $3,0 00 ROI: ($1,500 - $100) / $100 = 1,400% ROI: ($5,500 - $700) / $700 = 686% ROI: ($6,800 - $1,300) / $1,300 = 423% ROI: ($4,000 - $2,700) / $2,700 = 48% Average ROI is always declining

6. ROMI is a ratio of ROMI = Marketing Profit, Z/Investment, I Profit is a function of Investment ROMI = ƒ(I)/I Where profit, ƒ(I) = aI – bI 2 Profit is a function of Investment size ROMI = (aI – bI 2 )/I ROMI is a function of Investment size ROMI = a –bI

7. ROMI = (aI – bI 2 )/I ROMI= a –bI Investment $ ROMI Optimal size, I ROMI = a–bI

8. 20% How ROI is Really Used Hurdle Rates Allocation of Budget $50K to spend Justifying Debt for Investment Borrow up to $50K at 8% interest Investme nt ROIProfit #1$10,00075%$7,500 #2$10,00050%$5,000 #3$2,00040%$800 #4$8,00030%$2,400 #5$20,00025%$5,000 #6$10,00020%$2,000 #7$30,00010%$3,000 #8$10,0005%$500

9. The mistakes of a hurdle rate Investment $ ROMI Optimal size, I Spend down to the hurdle rate Low Hurdle rate

10. The mistakes of a hurdle rate Investment $ ROMI Optimal size, I Lower the level of investment to achieve the desired ROI High hurdle rate

11. How much should we focus on ROI? NOT MUCH We aren’t trying to maximize it, but rather to maximize profits But… We do want to measure returns or results of investments And we want to estimate expected profits We want to make sure that ROI will be above zero That the investment will create positive returns We can use ROI to compare investments As capital is usually limited Thinking about ROI prods us to understand numerically how investments generate returns

12. Buyer Readiness Investments AKLPCP + 64+ 32+ 16+ 8 + 4 + 2

13. Indirect Response: Pre-Purchase Goals + 64 + 2 Spend on Newspaper or Radio? Spend $500 or $5,000?

14. BizCafe: Investments in Advertising Do ad effects (on Awareness) decline with increased spending? Does anything other than Advertising affect Awareness? $0$0 Respons e Investment $ 0 Radio 5 Radio 10 Radio Period 2 (baseline)26.0% Period 331.1%36.5%41.9% Change5.1%10.5%15.9% Less baseline5.4%10.8%

15. Customer Responses to Investments (Cost of the Marketing Effort) The Response Curve Shape Matters $0 Response Investment $

16. Customer Responses to Investments (Cost of the Marketing Effort) The Response Curve Shape Matters $0 Response Investment $ Direct Relationship

17. Customer Responses to Investments (Cost of the Marketing Effort) The Response Curve Shape Matters $0 Response Investment $ Direct Relationship Linear Relationship

18. Customer Responses to Investments (Cost of the Marketing Effort) The Response Curve Shape Matters $0 Response Investment $ Direct Relationship Linear Relationship Exponential relationship

19. Customer Responses to Investments (Cost of the Marketing Effort) The Response Curve Shape Matters $0 Response Investment $

20. Questions?