Question

Return on investment (ROI) is profit divided by investment. In marketing, ROI is determined as incremental sales times gross margin minus marketing investment, all divided by marketing investment. Suppose that a company plans to spend $3 million to place search engine ads and expects $15 million in incremental sales. Its gross margin is estimated to be 45%.

1. Develop a spreadsheet to compute the marketing ROI.

2. Use the spreadsheet to predict how ROI will change if the incremental sales estimate is wrong (consider a range of values above and below the expected sales).

Answer 1

	$ (in millions)
Marketing Investment	3
Incremental Sales	15
Gross Margin (%)	0.45
Gross Profit=	Incremental Sales* Gross Margin
	6.75
Marketing ROI=	(Gross Profit-Marketing Investment)/Marketing Investment
	125%
Marketing Investment	Gross Profit	Marketing ROI	Marketing ROI %
5	2.25	-0.25	-25%
10	4.5	0.5	50%
15	6.75	1.25	125%
20	9	2	200%
25	11.25	2.75	275%

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