Understanding Return on Investment for Racers
Even if your race program is perfect for the brand and makes financial sense, half the marketing directors are going to ask the magic question, “What’s our ROI?” They are going to claim that they need a 3X or 5X return on their spending or the sponsorship won’t work for them. I even had a brand manager tell me she needed at 10X multiple for any sponsorship to make sense (even though her logic didn’t make any).
Return on investment is a metric that measures the performance or benefit of an expenditure. If a company spends $100 on something and it gets back $500, then the tangible return on investment, or ROI, is $400, or 4X the original investment. The $400 return is calculated as $500 less the initial expenditure of $100. Since $400 is four times the $100 investment, the ROI is4X.
This is a simplified example to make a point, but it only counts for tangible returns. Recall that sponsorship can have intangible value too. How can you measure the ROI of integrity or fan affinity?You can’t, although there is obviously a benefit. The world isn’t black or white, and ROI falls in the gray area. It is an important quantification tool that gives some marketing managers justification for their strategy, and it’s a moving target for others who disregard the metric as impossible to quantify.
Addressing ROI is a hurdle in your presentation, not a roadblock, so if it comes up, ask how the company calculates it. Some companies have a formula, but most do not. Trying to calculate returns for several hundred race teams is not something many people are prepared to do. This is where you can help them. The more information you give your sponsors in a year-end Proof of Performance Report (which I’ll go over in an upcoming issue),the more you help them justify the expense of your program.
Young, small, and fast-growing companies with flat organizational structures don’t rely on numerical data as much as big companies with a lot of employees. The more levels of management a company has, the more marketing managers need to justify their expenditures to supervisors, so they rely on measurable data to show they’re doing a good job. Where the owner of a small business instinctively knows when sales are up, the president of a Fortune 500 company doesn’t have any idea what’s working until he reviews consolidated financial statements. That’s why marketers at big companies try to measure ROI—so they can quantify the results of their marketing.
Since identifying, measuring, quantifying, and analyzing return on investment helps these bigger companies justify their expenses, you can assist them with third party data. Most events and properties use standard reports to justify media values. The reports can be a very effective way of showing relative value—one brand versus another, or one event versus another. Joyce Julius & Associates reports, Nielsen ratings, MRI indexes, Performance Research Inc. surveys, Rentrak reports, and industry-specific reports are some of the many sources that marketing directors use. Most race series will provide you with third-party exposure values because they want you to be well-funded so you can keep racing. Ask your series director for all the data they have to help you estimate a return for your sponsors.
Calculating the exactROI is impossible, so use the topic to demonstrate your understanding of the business of sponsorships. Show marketing directors that you understand their financial challenges, and you know how to support them with useful data.