More than one marketing project? Calculate NPV of Marketing Campaigns.
Net present value (NPV) is often used to determine how a marketing campaign or initiative is beneficial to a company. If NPV is greater than zero, the company should pursue the investment as benefits outweigh the costs. However, if NPV is less than zero, the reverse is true and the campaign either needs to be re-adjusted or abandoned. NPV allows marketers to make standardized comparisons for return on marketing investment (ROMI) of campaigns that may have different budgets and timelines. It can also be used to calculate the projected change in share price per campaign initiative. Projects worth pursuing will add the most value to a company’s bottom line and these are generally the projects with the highest NPV.
Corporate objectives of pharmaceutical companies will drive several potential project proposals for marketing and product line management, but the challenge lies in identifying which projects to pursue. We will begin by evaluating the cost to benefit ratio for digital marketing of a pharmaceutical over-the-counter (OTC) product by comparing the net present value (NPV) of the digital marketing initiative with the alternative option of enhancing a current product line; however, a company could also evaluate return on marketing investment (ROMI) of international expansion, replacing a product line, retiring a product line, etc. Because the product is OTC, we will estimate sales coming directly from consumers.
Calculating Marketing NPV: Example
Digital marketing launch planning is estimated to be around $100,000 as the company’s historical data has presented similar launch planning spends. A monthly spend of $40,000 can be anticipated from Google AdWords search volume and competitor data, which leaves us with negative $480,000 for year 0. The total cost of the first year will then be $580,000 after we add in launch planning costs. Sales data is extrapolated from a current and moderately successful OTC product at the company to forecast the lasting effects of marketing initiatives at a projected revenue of 2M per year for the next 10 years until patent expiry. Payback period is calculated to be 0.29 years, which translates into 3.48 months. At a coupon rate of 10%, discounted cash flow (DCF) shows that the digital marketing project will result in 11.7M more than we would have if we invested in normal business operations. (Please remember that if you are in a high growth market, coupon rate will not be 10%).
A similar concept can be applied to the calculations for enhancing a product line, so it is possible to compare these two initiatives side by side. Calculations from the table provide insight of the cost to benefit ratio of initiating various projects through comparison of NPV values. If we were solely looking at revenue it would seem like enhancing a product line could be a feasible option, but because we were able to calculate NPV we see that there is more value in initiating the digital marketing DTC campaign.