ROI, “Break Even” or NPV?

How to calculate the sustainable value of your Operational Marketing Excellence Program? There are many ways to calculate a return on an investment and to calculate value to shareholders. All these methods have their advantages and disadvantages and are accompanied by many smaller variations fine tuning the same advantages and disadvantages. Picking one means balancing the pros and the cons for your specific goal and topic. In a simplified world you could cluster the methods as follows:

  • Return on Investment measures the results minus the investment. It measures returns, not risk. If cash is not the issue, investment risks are minimal/unknown/ignored or the time between investment and return is (let’s say) less than a year, then ROI calculations are an option.
  • Payback Period or Break Even measures the time required for the cash inflows to equal the original outlay. It measures risk, not return. If the final outcome is not clear, but there is a high chance the cash will be back within a calculated and acceptable number of months, and risks for a bad investment appear to be low, then a Break Even calculation can pull in the investment.
  • Net Present Value includes returns, investments, the cost of capital and a risk premium all in one equation. It discounts or removes the interest component from the future cash flow, allowing you to put the initial capital investment and future cash flows on the same level playing field. It measures risks and returns over a longer period of time and shows you the complete value it resembles to you today.

For a topic like Operational Marketing Excellence, which requires a considerable investment in vision, budget and stamina, but which also offers an even more serious return on the mid-and long term, calculating the ROI or the Break Even point doesn’t do justice to the potential and might even show a negative investment advice because not all benefits are taken into account in the equation.

The Net Present Value calculation, however, offers a lot of possibilities. As Operational Marketing Excellence facilitates higher returns, drives lower investments and lowers risks over a longer period of time, all elements are present to create a realistic and fair picture.

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Author:Romek Jansen

Chief editor at MarketingGovernance.com. Founder of MRMLOGIQ.

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