Cannes, France – The locale of this year's most important global wireless conference – was calling Fernando Corona. But Mr. Corona, CEO of California-based V-Enable, couldn't justify spending three months' worth of his company's marketing budget to rent booth space. So instead of forking out $50,000 for a stall at the 3GSM World Congress show, he corralled some of his telecom colleagues into renting a yacht in Cannes.
V-Enable had to pay only a few thousand dollars for the vessel, but it gave the company great exposure. The 65-foot V-Enable yacht, which was moored right next to Microsoft Corp.'s 125-foot yacht, became the venue for business meetings and parties.
The mental exercise behind Mr. Corona's marketing decision involved the accounting concept of return on investment (ROI). In Cannes, V-Enable spent between $5,000 and $10,000. For that money, the company wined and dined three potential customers.
"I said, 'I'll feel comfortable that it justifies this level of investment if we get these three people to show up,'" Mr. Corona says. "When you pull the trigger on an event, advertising campaign, or direct sales, you need to know what your return is going to be. … If you have a very targeted account, $5,000 goes a long way – you can hop on a plane, take the client to dinner, and get a deal. If you are prospecting, you have to go to some of these trade shows. We knew our competitors were not exhibiting [at the GSM show], so we had a lot more traction."
In this rough-and-tumble economy, ROI calculations play a key role in controlling expenses. CFOs and other managers must prove they are getting the biggest bang for the buck on expenditures like advertising and information technology. But many experts warn that ROI deals with more than number crunching – it requires a lot of homework to get the numbers right. (For a primer on ROI calculation, see the accompanying story "The Math Behind ROI.")
For advertisers, a high ROI begins with choosing the right medium. "In the dot-bomb era, companies basically said, 'I built www.barbeques.com and I'm going to get as many people to come to my Web site as possible, and I don't care if I spend $50 per person,'" says Tony Dieste, president of Dallas-based advertising agency Dieste Harmel & Partners. "If you looked at their ROI, you'd see it would take 50 years to make up that $50 per person. So the ROI was upside down."
Mr. Dieste says that sometimes the right medium depends on the distribution channel. Dieste Harmel has developed a "Hispanic Intensive Targeting" program that isolates a client's stores and reads the sales volume in each of those stores. This type of data allows for correct calculation of ROI.
"If the general market is growing at 2 percent to 3 percent and the Hispanic market is underdeveloped in that market, then you would expect the Hispanic market to grow at higher levels," Mr. Dieste says. "In order to measure that you have to isolate the Hispanic volume in that market."
Easy calculation of ROI explains in part the popularity of direct marketing. "If you see a commercial for a telecom company with an 800 number, and you call that number – if the company is doing its job right – you are tracked, so they will know how many people actually bought the product or service," explains Hector Orcí of La Agencia de Orcí y Asociados in Los Angeles. "Advertising has the purpose of getting the person to dial the number. The smart companies track every campaign. They can tell what results the four o'clock soap opera delivered, and what the six o'clock news delivered."
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