You won’t get an accurate picture of the performance of a sales promotion if you consider only your hard costs and total sales increase resulting from the promotion. You’ll need to consider your intangible benefits, opportunity costs, profit margins and other factors associated with the sales you generated to understand the costs and benefits you achieved from your efforts.
Create a separate budget for the sales promotion rather than simply putting the costs into your overall marketing budget. Include the expense of designing the promotional materials, buying media and any staff time devoted to implementing and managing the event. Calculate the cost of any items you give away during the event.
Use historical sales data for the exact time period you will run your promotion to compare any change in sales between the two periods. Meet with your sales manager to determine whether factors besides the promotion affected sales during the promotional period. For example, you might have had a competitor go out of business since last year’s dates, a storm might have hit the area the previous year and decreased shopping or your sales might have been on an upward swing the previous six months because of a new salesperson or distribution channel. Use data and anecdotal assumptions to determine the exact increase in sales you believe the promotion generated.
Calculate the net profits of the sales you can directly attribute to your promotion to help determine your return. Remember that total sales figures won’t tell you your return on investment. In fact, a promotion that increases your sales can lose you money, depending on the size of the sales increase. You might find that even though you increased sales, your cost to generate those sales was $2 per item with a $1 profit per item. For example, if you spent $1,000 to generate an extra $5,000 in gross sales, you might think you had a positive return on your investment. But if your profit on those sales was $500, you’d lose $500 on the promotion.
Determine if you lost any opportunities by holding the promotion. When you hold a sales promotion, you use time and money on the project you could have spent elsewhere. For example, if you had taken the money you used on a three-month promotion and used it to lower debt, you would have decreased interest payments by a specific amount. If your sales staff took extra time to explain, set up and manage the promotion to customers, that might have taken their time from developing new accounts.
Estimate a dollar value the promotion gave to your brand or goodwill, if possible. List intangible benefits you might have received from the sales promotion, such as generating increased awareness, introducing you to new customers, or improving your image among your target customers. These benefits can sometimes exceed any profits you made from the promotion. Improving your brand might result in more retailers asking to carry your product or new customers visiting you year-round.
Calculate your ROI once you know your hard costs and have estimated your increased sales, net profits, opportunity costs and brand impact: Determine the increased revenues the promotion created. Determine the gross profits the promotion generated. Subtract the hard costs of the promotion from your net profits. Determine the dollar amount you believe your opportunity cost to be. Estimate the impact your improved branding will have on future profits because of the sales promotion. Review your tangible return on your investment from the first three steps, and then your overall return considering your intangibles, opportunity costs and future benefits.