The financial world is full of many acronyms and terms that can be baffling to the uninitiated. Two such business buzzwords are “Profitability Analysis” and “ROI Marketing” both of which have been reckoned to be crucial to any business especially in the current financial climate.
So what do these terms mean in plain English?
Simply put, a profitability analysis refers to the examination of costs and revenue return to determine the overall profitability of a venture—and at what level profit can be expected to be returned. Arguably this is the most important information that can be used in the decision of whether or not to make an investment, and is impacted further by other factors, such as a determination of how long it will take a given venture to return profit.
ROI stands for “return on investment” or return on invested capital more precisely. This is the amount of money expressed in a percentage, which is ultimately earned on a company’s total capital. This figure is calculated by dividing total capital into earnings—before interest, taxes or dividends are paid.
Both profitability analysis and ROI are important tools in marketing strategy formulation and refinement. Tens of millions of dollars spent on a marketing campaign that has a low return percentage requires that overall strategy and asset allotment be overhauled in order for companies to stay not only competitive but alive in today’s increasingly cutthroat environment.
The ideal marketing campaign is one that has low cost and a very high return on investment. The phenomenon of marketing being spurred on by popularity of “vital videos” is a recent example---otherwise dodgy music that has hooked listeners on sites like youtube.com have wildly surpassed carefully strategized campaigns from music industry marketing departments is but one recent example.
ROI analysis is key in marketing strategy due to its ability to identify which market segments for a product are not being well utilized. If there are certain areas or demographic groups that are not responding well to your product or service then additional effort and resources must be dedicated to reaching them. This results in an overall streamlining of costs and a higher rate of return, with less effort being expended in markets already well targeted and saturated by existing resources and efforts.
Profitability analysis becomes important in evaluating just how successful a revised marketing strategy has proven to be. At the end of the day it is vital to determine how much profit your company is making as a percentage of your spending. Companies may claim they are generating billions in revenues, but if they are spending equal amounts at the same time, the net effect is overall poor performance. Profitability must be high when contrasted to cost or the business for any venture to be considered viable, let alone successful in today’s market.
The ideal approach is to analyze profits and link them to marketing by looking at data from before and after certain campaigns. It is very important to look at a broader time frame for the product or service so the initial and medium term reaction to the marketing campaign can be seen. This way you will know exactly how your profitability analysis and ROI marketing are linked and how well your marketing strategy is performing.