Any sponsor must know how to measure the value that his investment has created. The ROI calculation not only provides an assessment of what happened, it is also a useful tool for considering future sponsorships.
What is the ROI calculation?
The acronym ROI stands for Return on Investment. For marketing and accounting, ROI is both a financial forecasting tool and an analysis of past operations. This means that, for a company, the study of ROI is important both for the future (forecast) and for the current evaluation (analysis).
To be more specific, the calculation of ROI is a mathematical method that serves to know and evaluate the risks of an investment; moreover it serves to calculate the possible gains that derive or will derive from it.
ROI as a financial tool
ROI is a financial tool. It can only be measured as a consequence of economic income or expenses. The calculation of ROI is in no way tied to “soft” data, such as brand awareness, “click-through rates” or web statistics. The classic formula for calculating ROI is the following:
(Total Revenues – Total Costs) / Total Costs x 100 = ROI%
The ROI is always expressed as a percentage to be easily compared with the other activities undertaken.
Net revenues… The sore point
One of the key values in the equation is about Net Revenues: this data represents the profit (or loss) resulting from the marketing initiative considered in a finite and determined period of time.
As obvious and predictable as it may seem, getting the financials right is one of the toughest tasks for marketers. In a November 2008 study conducted by Jupiter Research of more than 100 marketing managers in the United States, it was found that 78% of managers complain of great difficulty in obtaining sales data from the administrative offices of their company.
The application of ROI to sports sponsorships
A good sponsorship is one that, among other things, is able to increase sales by impacting the bottom line, generating profit. If we wanted to summarize:
Sponsorships = Brand Exposure -> Brand Preference -> Purchasing Intention
Frequent exposure of the brand ensures that it becomes an integral part of sports, athletes and events sponsored and that the positive values of the discipline settle on the brand and product. In this way, sponsorship is able to build a strong emotional bond between the brand and fans.
The target, which constantly sees a brand within the events it likes, develops a brand preference for it. This Brand preference has a direct impact on its propensity to purchase (in this regard, see also “Analyzing the influence of attitude towards sponsor and sponsorship awareness to purchase intention in Manado. Case Study: MotoGP”)
Excellent ROI is generated by good sponsorships
Regardless of the brands involved, what matters is that the sponsorship and related activities are authentic, that the sporting discipline and brand values are consistent and that the company implements all the activities necessary to get the most out of the partnership.
This is possible only if the sponsorship is genuine and responsive to the identity of the sponsor and respects the universe of corporate values, proving credible in the eyes of fans and consumers.
ROI calculation, future projections and Customer Lifetime Value
One of the exercises to engage in is to generate sound and reliable predictions about the future and the long-term profit possibilities resulting from a sponsorship. An example is the Customer Lifetime Value, or the value that a consumer represents for a company over its entire life. The ROI allows us, considering the cost of acquiring a customer and its value over time, to calculate the long-term benefits of our operations.
How to measure the ROI of Sponsorship
- Define effective research and data collection methods for all countries where sponsorship has been activated.
- Take measurements before, after and during the sponsorship
- Conduct statistical analyzes to measure how much sponsorship has influenced the level of sales and how much the perception of the brand has changed.
- Insert these data into a financial model that allows an effective calculation of the value generated both in absolute terms (how much has been earned) and in relative terms (how effective the sponsorship was compared to other initiatives).
ROI and cash flows
It is possible to measure the ROI of a multi-year program by considering the resources committed and the revenues obtained over a given period of time, usually 3 or 5 years:
- Cash flow are a summary of the costs and additional revenues generated by the project over its duration.
- The ROI calculation examines the net return of a project divided by the costs incurred to put it into action.
- In formula: (Total Revenues – Total Costs) / Total Costs x 100 = ROI%
Imagine a project that has a 200% ROI. The net earnings of this project are estimated at double of the cost for the activation of the project. Even more simply, for every euro invested, the project will generate 2 euro of profit, in addition to 1 euro to cost coverage and so, for every euro invested, the project produces 3 euro. The ROI is therefore 200%
Generally the ROI calculation takes into account the total investment costs in the analyzed period and it takes in consideration the possible lower costs and total revenues. The cash flows in a project like this one can be summarized in: Starting year, 1st year, 2nd year, cumulative, total.
How much is a sponsorship project worth?
According to a 2003 survey by International Data Corp./Alinean, 62% of executives say that the ROI of a project, to be considered satisfactory, should be between 50% and 300%. Regardless of the results of the project, in order to obtain transparent assessments, all expenses and revenues must have been taken into account and all data must have been measured accurately.
Calculating ROI creates value
Calculating ROI creates value for a company because:
- Numerically it produces a profit / cost ratio that can be used to measure the effectiveness and goodness of any project.
- As a percentage value, it is easy to make the results understood and explained.
- It analyzes the value of a project at the expense of the amount of money invested and earned, allowing to obtain valuations unrelated to the size of the activity.