People in marketing often talk at crossed purposes when discussing advertising ROI. There are many ways of defining 'ROI' and the figures can be wildly different. This illustration is designed to help reduce the confusion (or at least highlight the need for people to clarify the type of ROI they are referring to).

For reference, here are the equations:

Actual ROI = (additional $ profit generated by the advertising - total cost of producing and airing the advertising) divided by the total cost of producing and airing the advertising. i.e. the incremental $ profit obtained per $ invested in producing/airing the advertising.

Profit ROI = (additional $ profit generated by the advertising - cost of airing the advertising) divided by the cost of airing the advertising. This calculation doesn't account for the cost of producing the creative content and therefore makes advertising seem more cost effective than it actually is.

Revenue ROI = (increase in revenue generated by the advertising - cost of airing the advertising) divided by the cost of airing the advertising. This calculation can be useful for comparing different advertising activities but doesn't provide a meaningful estimate of whether the advertising was a good investment.

For more about the pitfalls of ROI see this post from Professor Byron Sharp.

​What to learn more? Try asking Virtual Dan White.

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