Calculating ROI on Marketing Investment
Source: Partner’s Report
Suppose a partner devotes 300 hours per year to new business development and his billing rate is $150 per hour. The value of his business development time is $45,000.
The target return on this investment is, say, 20 percent. Therefore the partner must produce a total of $54,000 in income from this investment of time.
If the average gross margin for the firm is 30 percent, this partner must produce revenue of $180,000 to achieve a 20 percent return. If there are 10 partners spending on average 300 hours per year, the goal would be $1,800,000 in new business. If this were a $7.5 million firm, this goal would represent a 24 percent rate of growth.
(Editor’s note: If the new business is recurrent, and you assume an average life of three years per client, a 20 percent rate of return would require about $73,000 in new business. Seventy-three thousand in revenue produces $21,900 in profit. The present value of $21,900 per year for three years at 20 percent is a little more than $45,000, i.e., a 20 percent ROI. The rate of growth using the same assumptions as above would be 9.7 percent.)
From Partner’s Report, March 2005, p. 9. For subscription information contact Institute of Management & Administration, Inc., 3 Park Avenue, 30th Floor, New York, NY 10016-5902. One-year subscription $329. 212-244-0360, [email protected]