A sponsor must know how to measure the value his or her investment has created. The ROI calculation not only provides an assessment of what happened, but is also a useful tool for considering future events and sponsorships.
What is ROI calculation?
The acronym ROI stands for Return on Investment (ROI). For the
marketing and accounting, ROI is both a financial forecasting tool and a tool for analyzing past operations. This means that, for a company, the study of ROI is important for both future (forecasting) and current evaluation (analysis).
To be more specific, ROI calculation is a mathematical method that is used to know and evaluate the risks of an investment; it is also used to calculate the possible gains that result or will result from it. Evaluating sponsor ROI is a must.
ROI as a financial tool
ROI is a financial tool. It is measurable solely as a consequence of economic income, or expenditure. True ROI is in no way tied to “soft” data, such as may be brand awareness, “click-through rates,” or web statistics. The classic formula to measure ROI is as follows:
(Total Revenues – Total Costs)
_______________________ X100 = ROI%
ROI is always expressed as a percentage so that it can be easily compared with other activities undertaken.
Net Revenues…The Sore Note
One of the key values in the equation is that of Net Revenue: this figure represents the profit (or loss) that results from the marketing initiative considered over a finite, fixed period of time.
As obvious and obvious as it may seem, getting financial data right is one of the hardest tasks for marketers. A November 2008 study by Jupiter Research among more than 100 marketing managers in the United States found that 78 percent of managers complain of great difficulty in obtaining sales data from their company’s administrative offices…and without this first step you cannot do anything.
The application of ROI to sports sponsorships
Good sponsorship is one that, among other things, is able to increase sales by impacting the bottom line by generating profit. If we wanted to summarize:
Sponsorships = Brand Exposure –> Brand Awareness –> Brand Preference –> Propensity to Buy
Frequent exposure of the brand ensures that it becomes an integral part of the sponsored sport, athlete, or event and that the positive values of the discipline settle on the brand and product. In this way, sponsorship succeeds in building a strong emotional bond between brand and fans.
The target audience, which constantly sees a brand within the events they like develops, brand preference for the same. This Brand preference directly impacts his buying decisions (about this see also “Analyzing the influence of attitude toward sponsor and sponsorship awareness to purchase intention in Manado. Case Study: MotoGP.”) and we can measure how much this impact is worth, in fact measuring sponsorship roi will give us a clear idea of the efficiency of our sponsorship investment from a mere commercial point of view. With actual numbers in hand a marketing executive will be in the perfect position to compare the Roi of the sponsorship with the roi of other communication and promotional activities.
Excellent ROI is generated by good sponsorships
What matters, regardless of the brands involved, is that the sponsorship and related activities are authentic, that the values of sports discipline and brand are consistent, and that the company implements all activities necessary to get the most out of the partnership.
And all this is possible only if the sponsorship is genuine and responsive to the sponsor’s identity and respects the universe of corporate values by proving credible in the eyes of fans and consumers.
The calculation of ROI, projections for the future, and Customer Lifetime Value
One of the exercises in which to engage is to generate valid and reliable predictions about the future and long-term profit possibilities from a sponsorship. One example is Customer Lifetime Value, which is the value that a consumer represents to a company over its entire lifetime. ROI allows us, by 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.
- Taking measurements before, after, and during sponsorship
- Conduct statistical analysis to measure how much sponsorship has affected the level of sales and how much brand perception has changed.
- Enter this data into a financial model that allows an actual calculation of the value generated in both absolute terms (how much was gained) and relative terms (how effective the sponsorship was compared to other initiatives).
ROI and cash flow.
It is possible to measure the ROI of a multi-year program by looking at the resources committed and revenues earned over a given time frame, usually 3 or 5 years:
- Cash flows are a summary of the costs and additional revenues generated by the project over its lifetime.
- The ROI calculation examines the net return on a project divided by the costs incurred to put it into action.
- In formula: (Total Revenues – Total Costs)/Total Costs x 100= ROI %.
Suppose a project has an ROI of 200%. The net earnings of this project are estimated to be twice the cost of activating the project. Even more simply, for every euro invested, the project will generate 2 euros of profit, plus 1 euro of cost coverage so for every euro invested, the project produces 3 euros. The ROI is therefore 200%.
Generally, the ROI calculation takes into account the total investment costs over the period analyzed and considers possible lowering of total costs and revenues. The cash flows of such a project can be summarized as: Starting year, 1st year, 2nd year, cumulative, total.
How much is a sponsorship project worth?
According to a 2003 survey conducted 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, transparent evaluations require that all expenses and revenues have been taken into account and that all data have been measured accurately.
ROI calculation creates value
Calculating ROI creates value for a company because:
- It numerically produces a profit/cost ratio that can be used to measure the effectiveness and goodness of any project.
- Since it is simply 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 for valuations unrelated to the scope of the activity.
For information on calculating ROI or how sports sponsorship can help your business, write to us via the form on this page or by email to firstname.lastname@example.org.