MKTG90026 Chap.11 Marketing Returns and Investment Decisions
Marketing Returns and Investment Decisions
Marketing finance metrics connect actions with revenue, operating profit, investment and time. This chapter compares return on sales, ROI, payback, present and future value, NPV, ROAS, MER and ROMI.
It shows why multi-period cash flows need discounting, why a revenue multiple is not a profit return, and why incrementality, contribution margin, attribution and the discount rate can overturn an apparently strong investment result.
What this chapter covers
- 01
Net profit and return on sales
- 02
Marketing share of sales
- 03
ROI and payback
- 04
Present and future value
- 05
Net present value
- 06
ROAS, MER and ROMI
Worked example · free
Discount a three-year investment
- 1Year one present value is 45,000 divided by 1.10.
- 1Year two present value is 45,000 divided by 1.10 squared.
- 1Year three present value is 45,000 divided by 1.10 cubed.
- 1The present values total 111,908.34 dollars.
- 1Subtract the initial 100,000 dollars to obtain NPV of 11,908.34 dollars.
Key terms
- Payback Period
- The time required for undiscounted cash inflows to recover the initial investment in the simple model.
- Net Present Value
- The present value of future cash inflows minus the initial investment.
- Marketing Investment Return
- Incremental marketing contribution after spend divided by marketing spend.
Marketing Returns and Investment Decisions FAQ
Why does NPV discount later cash flows?
A dollar received later is worth less than a dollar received now when the discount rate is positive. NPV converts each future cash flow to present value before comparing their total with the initial investment.
How do ROAS and ROMI differ?
ROAS divides attributed advertising revenue by advertising spend. ROMI uses incremental revenue attributable to marketing, converts it to contribution, subtracts marketing spending and divides by that spending. The second measure adds profitability and incrementality assumptions.
When is payback useful?
Payback is useful when recovery speed and liquidity matter, but the simple measure ignores cash flows after the cutoff and usually ignores discounting. Use it alongside NPV rather than as a complete statement of value creation.
What can reverse a positive marketing investment result?
Lower incrementality, a smaller contribution margin, delayed cash flows, omitted servicing costs or a higher discount rate can overturn the base case. Test plausible assumptions and state the break-even value before recommending commitment.
Exam move
Draw timelines before discounting and label whether cash arrives at the beginning or end of each period. Compare payback with NPV on the same investment, then reconcile ROAS, MER and ROMI using one campaign. Run sensitivity on cash flow, discount rate, contribution margin and incrementality, and finish every recommendation with the assumption that can reverse it. Begin with a cash-flow timeline.
Put the initial investment at time zero, place each later inflow or outflow at its stated period and label whether payments occur at the beginning or end. Convert all rates and periods to a compatible basis. Discount each future amount separately, sum present values and subtract the initial outlay to obtain NPV. Predict that a higher positive discount rate reduces the present value of later positive cash flows.
Compare decision measures on the same project. Return on sales relates profit to sales, ROI relates a defined return to investment, payback records recovery time, and NPV measures value after the time value of money. Simple payback can be useful for liquidity but ignores cash flows after the cutoff and generally ignores discounting.
Create two projects with the same payback but different later cash flows to show why ranking can change under NPV. Reconcile marketing measures from one campaign.
ROAS divides attributed advertising revenue by advertising spend, MER divides a broader revenue base by total marketing spending under the stated definition, and ROMI should use incremental revenue converted to contribution, subtract marketing spending and divide by that spending. Write every numerator in words before using the acronym.
Attribution, incrementality, revenue and profit are not interchangeable, so a large revenue multiple can coexist with a weak profit return. Build a sensitivity table for incremental revenue, contribution margin, campaign cost, cash-flow timing and discount rate. Identify the break-even value of the most uncertain input. If a campaign has delayed benefits, compare its NPV with a short payback view and explain the tension.
Check whether ongoing servicing, fulfilment or retention costs are omitted and whether a terminal value is justified. A model should expose assumptions rather than hide them behind a precise percentage. For timed practice, use five headings: timeline, cash-flow definition, formula, result and decision. Carry full precision until the final answer and verify whether the result is dollars, a ratio, a percentage or a time period.
Keep an error log for undiscounted future amounts, time-zero flows discounted again, revenue substituted for contribution, attributed sales treated as incremental and inconsistent investment bases. Finish every recommendation with the assumption most likely to reverse it and the evidence needed to monitor realised value.
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