Calculating LROI for live brand experiences (long term return on investment)
An Excerpt from the book: Experiential Marketing
By Shaz Smilansky 

Calculating LROI for live brand experiences

The sales generated from a live brand experience should be seen to be symptomatic of the word of mouth reach generated from positive, two-way, brand-relevant interaction. By understanding that word of mouth generates sales; we get closer to correlating the number of interactions generated from the live brand experience with the number of sales generated from the live brand experience.  By creating a link between the number of interactions of the live brand experience and the long term word of mouth reach, we can correlate the interactions to the cost of customer acquisition. The ultimate aim is to accurately estimate the long-term return on investment (LROI) of live brand experiences.

The long-term effect that word of mouth has on sales is greater than with any other approach. This is why, by using a model that calculates LROI, which takes the word of mouth reach of a live brand experience into account, we can quantify the impact that the live brand experience has on sales (which should be at the core of the integrated experiential campaign and combined with the ROI results of the amplification channels). 

The steps involved in calculating the LROI for live brand experiences formula are:

Step 1.

Each person who interacts in a live brand experience is likely to tell 17 others. Therefore, the Word Of Mouth Reach can be calculated as the Number of Interactions multiplied by 17, plus the number of interactions. [i]

Step 2.

The Number of Sales (estimate)can be calculated as 2.6% of the Word Of Mouth Reach of the live brand experience (this percentage is based on the average number of sales from direct mail campaigns[ii], even though it is proven that word of mouth is more likely to generate purchase consideration than any other marketing)[iii],[iv], [v] , [vi]

Step 3.

The profit generated from the live brand experience can be calculated by multiplying the Profit per Sale by the Number of Sales (estimate).  Then subtracting the cost of the live brand experience.

Step 4.

In order to calculate the LROI you divide the profit generated by the cost of the liver brand experience.

The formula is:

LROI = (X ÷C) x100

 (This is the profit divided by the cost, multiplied by 100)

S= number of sales (estimate) based on 2.6% of W (Word of mouth reach)

P = profit per sale

X = the profit generated from the live brand experience, based on S (number of sales) x P (profit per sale)

C= cost of the live brand experience

N= the number of consumer interactions with the live brand experience

W = the word of mouth reach, based on 17N +N

A small scale example:

Hamed is the marketing manager for a website selling customised greeting cards that can be ordered online and posted in the mail.  His cards sell at £4 and his profit per greeting cards is £1.50.  He approached an experiential agency to create an integrated experiential campaign, featuring an interactive greeting card road-show and amplification of the activity using PR and digital advertising.  The live brand experience channel’s total cost was £50,000 and generated 115,000 interactions.  He wanted to measure the LROI for the live brand experience and used this model to estimate what his long term return on investment would be.

Step 1

He multiplies the number of interactions in the live brand experience (115,000) by 17, (the number of people that each participant will tell about the experience on average)[vii] and then adds the original number of interactions to get the word of mouth reach (2.07 million).

Step 2

He gets the number of sales (estimate) by calculating 2.6% of 2.07 million (the word of mouth reach) to get the estimated number of sales resulting from the word of mouth reach.  This produces 53,820 sales.

Step 3

To get the profit generated from the live brand experience, he multiplies the profit per greeting card, which is £1.50 by the number of sales (53,820) to get £80,730.  Then he subtracts the cost of the campaign, (£50,000) to get the profit generated of £30,730.

Step 4

He calculates the LROI of 161% by dividing the profit generated from the live brand experience by the cost of the live brand experience, and multiplies the result by 100.

The formula is:

LROI = 161% , based on (X ÷C) x100

S = 53,820 number of sales (estimate) based on 2.6% of W (Word of mouth reach)

P = £1.50 (profit per sale)

X = £80,730 the profit generated, based on S (number of sales) x P (profit per sale)

C = £50,000 (cost of the live brand experience)

N = 115,000 (the number of consumer interactions with the live brand experience)

W = 2.07m (17N +N, the word of mouth reach)

In this case, Hamed can predict that 161% will be the long term return on investment from the live brand experience activity, because he used the formula which factors in the long term effect of the campaign, taking into consideration the estimated word of mouth reach. 

Actually, this is a very conservative estimate because the 2.6% return is based on an average return from a direct mail campaign[viii], whilst word of mouth has been proven to be around ten times more effective, and also has been voted above traditional media as most likely to drive purchase consideration.

To calculate the return on investment of the experiential marketing campaign in full, it is important to include measurement of every channel, including the amplification channels.

The other marketing communication channels that Hamed used to amplify the live brand experience for his online greeting cards were interactive online ads and PR.  The interactive online ads were experiential in nature because they featured slideshows showing some of the cards made by consumers who had participated in the live brand experience, and an invitation to submit a card design to be shown on future ads.   The amount of people who clicked on an online advert and then purchased a card measured the success of the online channel. The PR channel was based on a photocall of all the brand ambassadors and consumers engaging in the live brand experience, which went on to feature in a number of national and local newspapers and magazines, as part of stories on connecting people.  The PR channel was measured by column inches, in terms of how much the space would have cost if it were paid advertising space.  The online and PR metric he used are commonly-used measures across the industry, though obviously approaches vary. Hamed combined the LROI generated from the live brand experience with the generic measures that he placed on the PR and online advertising channels, allowing him to evaluate the success of complete integrated experiential marketing campaign.  

Therefore, if the live brand experience is at the heart of the overall marketing communications strategy and amplification channels are used, then it is important to try and evaluate the success of the integrated experiential campaign as a whole.

The LROI gives you the figure for the longer-term financial return you can expect to gain from the live brand experience.  Depending on whether it is a high involvement purchase (like a car) or a low involvement purchase (like a candy bar), the timeframe can vary from 1 day, to 1 week, to 5 years.   Obviously, people do not go out and replace their living room furniture every week so it is unreasonable to try and measure the long-term return on investment of a live brand experience campaign that is designed to increase sales of household furniture just a week after the campaign is over.  By using the LROI formula, it is easy to evaluate and estimate the long-term effect that the live brand experience part of the experiential marketing campaign will have.  Traditional and digital marketing communications channels already have their own standardised metrics which can facilitate ROI calculation.  By combining the LROI of the live brand experience and the ROI of the amplification channels for the evaluation, we can begin to predict the combined effects of the complete campaign. It is important to also factor in the CLV (the lifetime value of the customer), as well as looking at the initial value of the customer acquisition, especially in specific industries where the long term profit to be gained from each customer is greater down the line. One example is the gaming industry, where the profit margin on a console is far lower than the profit margin on the consumer buying video games on an ongoing basis. 

Most importantly, if you would like to generate long-term return on investment from experiential marketing, you must invest in a long-term experiential marketing strategy.  By placing live brand experiences (which should not always be restricted to face-to-face execution) and the experiential philosophy at the core of your long term marketing strategy, the long-term return on investment will be far greater than if you approach it as a tactic for a quick sales uplift.