Companies spend a sum ranging from 7% to 11% of their revenue annually on marketing efforts and while this might seem like a decent amount to some while others would call this risky.
Why is this so?
The reasoning behind this argument can be the conventional approach taken whereas this expense is considered as a charge on profit rather than an investment made in order to gain future benefits. Traditionally, the emphasis used to be on the tangibility of the paybacks which were considered near to impossible to prove for the outlay required for rural marketing.
This lead to the issue of rationalization of the investment so made, how to justify the increasing pile of funds that organization’s allocated in the name of rural marketing, promotion, and advertising.
How to justify rural marketing budgets?
The answer can be summarized in three golden words:-
Return on Investment (ROI)
Return on Investment or ROI as it is commonly known is a profitability ratio which can be calculated using different approaches and formulas. It is a mathematical yardstick to measure the benefits reaped from the investment made in rural marketing. The rationale behind the inclusion of numbers is to provide a clear and precise result to people who are otherwise unable to read between the lines.
For the uninitiated, let us take an example pertaining to our daily life where you are approached by two different salesmen selling their schemes.
1- Mr. XYZ comes to you and offers you an opportunity to invest Rs.5, 000/- in his scheme, if you do invest, he promises that you will see a return of 8% within the next six months.
2- Mr. ABC comes to you and offers you a unique opportunity to invest Rs.5,000/- in his new company but he cannot promise you a percentage of return. The return is designed based on the future growth of the company which is difficult for you to assess.
What would you do?
Even when the amount is less, we would prefer to be assured on what returns it is yielding us, without which our desire seems to fade away.
Now, imagine the perplexity of top management or finance officer when they are asked to approve up to 8% of their revenue on rural marketing. This is exactly why there is a pressure on marketers to justify the requirement for these funds but the trouble sets in where the calculation becomes a big puzzle.
Why is calculating ROI important?
- In order to satisfy the doubts that may surface in management’s mind over the improbable returns of marketing campaigns and prove their success.
- The rural marketing agency should incorporate performance parameters such as ROI in order to communicate its worth to the clients.
- Management of the organization is not necessarily trained to identify and calculate such indicators and therefore ROI assists them in making better decisions.
- Plays a significant role in placing reassurance in the services of the rural marketing agency.
How to calculate ROI?
Even though it is incredibly difficult to establish a direct connection to the expense made and benefits received by the company. Even when indirect links are being built, there remains suspicion of involvement of other external factors.
However, parameters can be trusted to give a near accurate replica of the actual results to play to the vanity of financial inclusion.
Few ways to calculate the ROI:-
- Sales Approach
ROI = (Increase in growth- Marketing Cost) / Marketing Cost
- Gross Profit Approach
ROI= (Gross Profit- Marketing Cost)/ Marketing Cost
- Profit approach
ROI= (Gross Profit- Incremental Expenses)/ Marketing Cost
- Customer Approach
ROI= (Customer Value – Marketing Cost)/ Marketing Cost
- Incoming Leads Approach
ROI= (Increase in leads- Marketing Cost)/ Marketing Cost