My guess is that if you are reading this Blog, your profession is sales or marketing and not accounting. I’m not an accountant either, but I know that if you want to understand how your company operates, it’s a very good idea to understand how your company makes money. In this final installment of this series, I’ve outlined a few key business metrics that will help you have an intelligent discussion regarding the profit impact of lead conversion as well as how much money should be invested in future marketing campaigns. Knowing the following four metrics will help you sound like the smartest person in the room.
Nothing ground breaking here. Profit is simply Revenue – Cost. I list this as a key marketing metric because business inclination is to focus on total revenue not profit. Bigger is better, isn’t it? An alternative strategy would be to build profit, brand equity, and compete on value. Value-based marketing helps build the brand. Building the brand is what franchising is all about.
2. Net Present Value
So, how do you put a smile on the face of your CFO? Talk in terms of Net Present Value, Internal Rate of Return, Payback, and Return on Marketing Investment. There is much written regarding these metrics that is beyond the scope of this blog. I’ll provide a brief, easy-to-grasp description of these tools and how they relate back to what you are trying to achieve – maximum value and brand equity for your franchise.
So, what is Net Present Value? Most franchisors sign long-term deals with their franchisees. Some are 15 years or more. A dollar today is not worth what it will be a year from now let alone 15 years from now. So, to put revenue in perspective, you need to account for a discount rate of inflation and an interest rate. This is clearly an accounting function, but it is important to understand how this is calculated so you can speak intelligently about the true NPV of the revenue generated by each marketing campaign. Over the lifetime of the relationship with the franchisees, the marketing campaign investment is more valuable than just one-time profit. Simply put: NPV = PV – Cost.
3. Internal Rate of Return
One the most important metrics that your CFO will be looking at is Internal Rate of Return or IRR. It is very similar to Return On Investment with one difference. IRR takes into consideration how the franchisor calculates how money compounds internally. For example, if in a time period there is $50K profit and the IRR is 25 percent, in the second time period the $50K will grow to $62.5K. IRR is set internally and helps management decide if a marketing campaign is a good investment.
Payback focuses on how long it takes for a marketing campaign to pay back the money invested in the campaign. A payback time period is when the profit goes from negative to positive.
Finally, a word about Return on Marketing Investment (ROMI). That formula is the key metric regarding how to make marketing campaign budgeting decisions. ROMI is calculated by taking the Net Present Value, Internal Rate of Return, and Payback all into consideration. The ROMI is an excellent framework for launching any marketing campaign – especially a start-up because it provides a metric for financial investment.