Understand what return on investment your marketing efforts are delivering with this straightforward guide.
Making an accurate marketing ROI calculation is one of the most important parts of any digital marketing strategy. ROI helps you understand where to put your marketing dollars. It lets you know how well your campaigns are paying off. Most importantly, it shows what impact your marketing is having on your business.
Measuring marketing ROI can also get tricky. There are all kinds of variables to consider when it comes to ROI in marketing.
You need to make sure you use the right marketing ROI formula to help you understand exactly what your marketing efforts are resulting in.
In this guide, we break down everything you need to know about marketing ROI. We cover how it works and how to accurately calculate marketing ROI for your campaigns.
- What is Marketing ROI?
- ROI vs ROAS – What’s the Difference?
- How is Marketing ROI Used by Companies?
- How to Calculate ROI in Marketing
- Calculating Campaign Attributable ROI
- Challenges With Calculating Marketing ROI
- What is a Good Marketing ROI?
- Measuring ROI for Lead Generation
- Tips for Improving Marketing ROI
What is Marketing ROI?
Marketing Return on Investment (ROI) is a measure of the profitability of your marketing efforts.
It’s calculated as the return (revenue) generated from a marketing investment divided by the cost of that investment.
ROI is used to determine how effective a marketing campaign is. ROI in marketing is also used to help you allocate marketing resources more efficiently.
The general goal of any marketing campaign is to maximize the ROI while minimizing the cost of the marketing activities. Basically, marketing campaigns with a good ROI generate more money than they cost.
ROI vs ROAS – What’s the Difference?
ROI (Return on Investment) and ROAS (Return on Ad Spend) are two commonly used metrics to measure marketing efforts.
ROI measures the profitability of general marketing investment. It is expressed as a percentage or a ratio.
In marketing, ROI measures the return on marketing investment by taking into account all marketing expenses (e.g., media spend, production costs) and comparing it to the revenue generated from those efforts.
ROAS (Return on Ad Spend), on the other hand, is a metric that measures the return generated from advertising spending. It’s calculated as the revenue generated divided by the advertising spend.
ROAS is used to measure the efficiency of paid advertising efforts, such as pay-per-click (PPC) advertising or display advertising.
So, in summary, ROI measures the profitability of all marketing efforts, while ROAS measures the efficiency of advertising spending.
How is Marketing ROI Used by Companies?
Calculating ROI is an essential task at the organizational level of marketing. It helps marketers make more informed business decisions and understand what their marketing efforts are actually achieving.
Understanding the ROI generated from a campaign is essential for a couple of different reasons.
Justifying Marketing Spend
To secure a marketing budget and resources for future campaigns, it’s essential to accurately calculate the ROI of your current marketing efforts. This helps allocate budgets effectively. It also helps you dedicate more resources to campaigns that deliver higher ROI.
Distributing Marketing Budgets
Understanding the revenue generated from different online and offline channels is crucial in properly distributing the marketing budget. Marketers can determine which efforts drive the most revenue and allocate budgets accordingly.
Measuring Campaign Success and Setting Baselines
Measuring ROI helps marketers determine the impact of individual campaigns on overall revenue growth. This can be used to establish baselines for success and adjust efforts to maximize marketing impact.
Tracking the marketing ROI of competitors provides insights into the organization’s performance within the industry. It helps keep marketing efforts competitive by adjusting baselines based on competitor estimates.
How to Calculate ROI in Marketing
There are a couple of different ways you can measure marketing ROI, but the easiest is to simply compare your marketing costs to your sales growth.
To do this:
- Subtract the marketing cost from the sales growth of the business or product line
- Divide the result from step 1 by the marketing cost
The formula would look like this:
ROI = (Sales Growth – Marketing Cost) / Marketing Cost
For example, if the sales grew by $1,000 and the marketing campaign cost $100, then the ROI would be 900%:
ROI = ($1000 – $100) / $100 = 900%
Pretty straightforward. Although, there are more factors to consider when creating marketing ROI formulas.
When calculating marketing ROI, you need to consider the various factors that determine the total ROI of your marketing efforts. The definition of “return” may vary depending on the marketing strategy and campaign objectives.
Any additional expenses associated with implementing the marketing campaign should also be considered.
Here are some key elements to factor into your marketing ROI calculations:
- Total Revenue: This is the overall revenue generated from a particular marketing campaign. By considering total revenue, marketers can have a comprehensive understanding of their marketing efforts and how they impact the business.
- Gross Profit: Gross profit indicates the total revenue generated in relation to the cost of production or delivery of goods and services. It can be calculated by subtracting the cost of goods from the total revenue.
- Net Profit: This takes into account the impact of marketing efforts on the net profit, which is calculated by subtracting additional expenses from the gross profit.
It’s also super important to have a consistent definition of profit/expenditures and overall ROI across all marketing ROI measurement efforts. This includes overhead and internal expenses, agency fees, media buys, and creative.
Another way to calculate ROI is through Customer Lifetime Value (CLV), which measures the value of each customer relationship with a brand over time. CLV can be calculated using the formula:
CLV = (Retention Rate)/ (1 + Discount Rate/ Retention Rate).
Calculating Campaign Attributable ROI
The straightforward ROI calculation above is useful. However, it relies on the assumption that your entire month-over-month sales growth is directly attributed to a marketing campaign. This is not always the case.
To gain a better understanding of the impact of marketing channels, it’s important to include comparisons. Comparing monthly sales from the business line prior to the campaign launch can provide a clearer picture of the specific campaign’s effect.
To refine the impact, a 12-month campaign analysis can be used to calculate an existing sales trend. If the sales have an average organic growth of 4% per month over the past 12-month period, then 4% should be subtracted from the sales growth in the ROI calculation for the marketing campaign.
The formula becomes:
(Sales Growth – Average Organic Sales Growth – Marketing Cost) / Marketing Cost = ROI
For example, a company with an average organic sales growth of 4% runs a $10,000 campaign for one month and experiences sales growth of $15,000. Based on historical monthly averages, $600 (4%) of that growth is organic.
The calculation is:
($15,000 – $600 – $10,000) / $10,000 = 44%
In this case, removing the organic growth reduced the ROI from 50% to 44%, which is still an impressive return.
For companies with negative sales growth, slowing the trend is also considered a success.
If sales dropped $1,000 a month on average over the past 12-month period and a $500 marketing campaign results in a sales drop of only $200, the campaign has an ROI of 60% (($800 – $500) / $500), where $800 is the avoided loss ($1,000 – $200). This is a significant return in the first month of a campaign, as it helps to defend sales before promoting growth.
Challenges With Calculating Marketing ROI
Calculating the ROI of marketing strategies may seem straightforward, but it can actually become complex. There are a couple of challenges to overcome when trying to accurately evaluate marketing ROI.
To accurately measure marketing ROI, there needs to be a clear and consistent sales baseline to compare against. Measurements should also take into account external factors that affect campaign success.
Many marketers focus on short-term metrics like click-through rates and social shares, but campaigns focused on long-term goals like brand awareness or customer retention often take months or years to show full impact.
Omnichannel Nature of Marketing
Today’s campaigns encompass multiple touchpoints across online and offline channels. Focusing on ROI for individual channels won’t provide a complete picture of marketing impact.
Multiple Touchpoints Before Purchase
It takes several touchpoints, both online and offline, before a consumer makes a purchase. To measure marketing ROI accurately, it’s important to understand the impact of each touchpoint in the sales funnel.
Outdated Attribution Models
Attribution models used to measure the impact of touchpoints and channels can lead to misattribution and skew the accuracy of ROI measurements.
Aggregate measurements like media mix models do not provide enough detail, and granular measurements like multi-touch attribution may overlook the impact of offline channels and external factors.
What is a Good Marketing ROI?
A “good” marketing ROI is subjective. It depends on factors like the industry, target audience, marketing goals, and investment. Technically, any marketing ROI that exceeds the cost of investment and positively impacts the bottom line is considered good.
A common benchmark for a good marketing ROI is 5:1, with higher ratios of 10:1 being considered exceptional.
Anything below a 2:1 ratio is generally not considered profitable, as the costs involved in the production and distribution of goods and services often mean that the returns will simply cover the expenditures.
However, organizations with overhead costs lower than 50% of their sales price can still make profits at lower ROI ratios. It’s important to take into account the specific overhead costs, margins, and industry-specific factors for each organization, as these can greatly impact the calculation of marketing ROI.
Measuring ROI for Lead Generation
We’ve been focusing on sales growth that comes as a direct impact from marketing. You can calculate marketing ROI like this for campaigns like promoting products on your online store.
However, you also get campaigns aimed at generating sales leads that the sales team converts into actual sales. This means marketing doesn’t result in direct dollars, so measuring ROI can be tricky.
To measure the ROI in this case, you need to calculate the dollar value of the leads by multiplying the growth in leads by your historical conversion rate (the percentage of leads that turn into sales).
For hybrid campaigns, where the marketer aims at a non-sales conversion, such as getting people to sign up for monthly reports by giving their email addresses, the ROI still needs to be measured by tracking the number of leads that eventually turn into paid sales for goods or services.
Tips for Improving Marketing ROI
To optimize future marketing performance, it’s important to make the most of what you’ve learned about marketing ROI. Here are a few tips to help you improve your ROI for long-term marketing success.
Set Clear Objectives
In the book “What Sticks: Why Most Advertising Fails and How to Guarantee Yours Succeeds,” Rex Briggs introduced the term “ROMO” (Return-On-Marketing-Objective). ROMO emphasizes that there is often more to a campaign than just ROI – such as changing brand perception.
Marketers should therefore set clear objectives that define their ROMOs and determine how to measure and include these factors in their ROI calculations. This may involve using metrics such as brand awareness surveys, social engagement, or the ratio between MQLs and SQLs.
Determine Marketing Costs
Knowing the costs associated with your marketing efforts, such as creative development, personnel, agency fees, and overhead, can help you more effectively measure your marketing ROI.
Use Marketing Analytics Tools
By leveraging the right attribution models and marketing measurement strategies, you can gain a better understanding of how consumers interact across omnichannel touchpoints.
Consider using a marketing analytics platform that unifies disparate measurements and provides a clearer picture of your ROI. Having the right analytics tools can help you make more informed decisions and improve the accuracy of your ROI calculations. Having an interconnected, all-in-one marketing solution also makes it easier to monitor your overall marketing performance.
Measuring marketing ROI is an essential function for running a successful marketing strategy. Without knowing this critical metric, you won’t be able to understand whether your marketing efforts are actually helping your business’s bottom line.
So follow the marketing ROI formula above and make sure to factor in the right elements when you measure ROI. Knowing this will help you create more impactful marketing initiatives that drive better results for your business.