In all the spheres of life, we invest time and money because we want something to get in return. How do you figure out whether or not those investments paid off?
Simple—compare the cost and benefits. If the benefits you gained out of an effort outweigh the cost you incurred, this means you have made the right investment and vice versa.
In practice, it’s a little more complicated. You need a way to consistently measure those investments and determine if you’re headed in the right direction, or if you need to revisit your strategy.
Marketing return on investment is one of the key performance indicators used by organizations to measure the effect of all their marketing efforts on profits and sales growth.
Using marketing return on investment, every organization can measure the extent of their success in their marketing initiatives, both overall and campaign-wise.
What is Marketing ROI?
In simple terms, ROI in marketing measures the revenue of your marketing efforts. Marketing ROI instigates the marketing leaders of any organization to follow a revenue-focused approach and remain accountable for the investments they make in pursuing their marketing strategy.
Calculating marketing ROI has become important for business for a few reasons.
First, it helps you identify which marketing campaign remained successful and which requires a different strategy.
It also helps the leaders of the organization make informed decisions.
Let’s take the example of television or social media ads for which the company has made a certain amount of investment. This includes all the expenses associated with that particular ad.
Marketing ROI will help you figure out in terms of a number if the campaign remained beneficial by influencing a certain number of buyers and they made the purchase.
It helps draw conclusions about whether the ad was worth investing in or if there’s another better source to reach out to the target audience and influence them.
Calculating Marketing ROI also assists you in allocating the budgets for various campaigns.
Marketers can learn how to calculate ROI in marketing by analyzing the competitors. This will help you to remain competitive by making comparisons against others in your industry.
Lastly, the rising return on investment can keep your marketing department motivated to search for new avenues of growth and keep contributing to the business expansion with their individuals as well as team efforts.
Marketing ROI Examples
There are several areas of marketing where you invest to influence your buyers. These areas are worth discussing in detail because they are used to track your Return on investment. Here are a few examples:
1. Content Marketing
The importance of content marketing can be judged from the fact that around 53% of companies use content marketing for promoting their business.
Content marketing refers to creating and distributing material online in the form of videos, guides, or blog posts to develop potential buyers’ interests in your product or service.
The more authentic and detailed content you provide, the better is the chance that you attract your customer toward your product.
For example, you are a cosmetic brand and keep on publishing regular blogs on makeup tips such as how to enhance your lips, eyelashes, or anything that comes under this niche.
The reader is most probably someone interested in using cosmetics. This means they are your potential buyers. Once you get your target audience’s attention through your content, there’s a good chance that they’ll purchase via links or brand mentions.
Nowadays, companies are investing a lot in content marketing as it’s also important for search engine optimization (SEO) efforts. SEO can also contribute towards seeing a bigger ROI from your content, as it can help increase visibility in major search engines.
2. Email Marketing
Email marketing is undoubtedly the most effective online marketing strategy that promises a good return.
Email marketing involves sending a targeted message to your potential customers to introduce your product, show them the benefits, and motivate them to make a purchase.
But it is not all about potential clients. Email marketing is also being widely used to develop relations with your current customers. For example, a bank account holder keeps on receiving emails regarding what’s new to the service and much more.
Because 9 out of every 10 marketers use email marketing to distribute marketing content organically, it is important to see if these marketers are getting something in return.
3. Video Marketing
Used for building customer rapport, promoting products and services, and arousing interest within the audience, video marketing is a widely used marketing strategy nowadays.
Another reason for the popularity of video marketing is that it’s an entertaining one and engages the audience. Also, it can have a huge return on investment. Big business giants and small startups alike like to invest in this area.
From the perspective of business, it’s easy to create a video. You just need to have access to the internet and you can teach someone how to cook, or how to sew or make something. You don’t need a major production budget to generate effective video content.
Even home-based businesses and startups utilize video to feature their products, services, and ideas. And with the current work-from-home crowd, you’ll find a lot of businesses producing content from the comfort of their home.
Ads refer to all types of advertisements that deliver less personalized sponsored messages to the target audience.
There are many sources of advertising through which you can promote your products, service, or ideas including newspapers, TV, radio, magazines, catalogs, leaflets, or brochures.
With the advent of digital marketing, ads on social media, videos, and popular websites are also not uncommon. Therefore, it’s a critical factor that can make your marketing strategy win.
5. Social Media Marketing
Social media marketing refers to promoting your brand on social media channels. This trend is rising because the number of social media channel users are rising day by day.
From small businesses to the world’s top-notch companies, lots of marketers are using the internet to promote their products. This is because better social media campaigns help build brand loyalty, interaction with customers, and get feedback.
You can understand the success of this strategy from the fact that many people just make a page of their business on a social media channel and start promoting their products and services and in many cases, they start gaining customers.
Nowadays, most TV ads and advertising efforts, in general, can fail to get your audience’s attention. They just want to google what they need and make a decision.
Knowing this trend, company’s are now investing in this aspect of marketing where they try to optimize their online available content according to the criteria of search engines.
Once you start ranking higher in the search engine results, you have a better chance to attract customers and get better conversion rates.
This whole process is not an easy task and needs businesses to invest time and resources in it. Then they can get something in return. Therefore, seeing how much your SEO efforts have paid you back in terms of conversion and building your client base is very essential.
What is A Good Marketing ROI?
Good marketing ROI means that every single dollar that you spent on a marketing campaign has earned you more than a dollar. Ideally, it is said that a good marketing ROI is 5:1 and when you make a curve, it lies in the middle.
This means on average you should get five dollars at least for every one dollar that you spend on your marketing. Sometimes you’ll see that a 10:1 ROI is achieved, but cases like that are rare, especially starting out. In the beginning, don’t expect to see such a high ROI.
Sometimes a break-even point, that is no profit, no loss is fine. It all depends on circumstances and your marketing preferences.
You have just started your business and you need time for building your business’s credibility. Considering these factors, you did not perform that badly.
Similarly, an 8:1 marketing ROI though looks good but it may be a sudden hype as a result of your campaign and you might need some more time to get an accurate picture of your marketing ROI.
What Are The Challenges of Measuring Marketing ROI?
In practice, marketing ROI can be a bit difficult to calculate. You have to take a few factors into account while measuring ROI. Let’s have a look at some of the common challenges that you may face while calculating a marketing ROI and figure out and answer an important question that everyone starts out asking:
Why is marketing return on investment so difficult to measure?
1. Some Marketing Campaigns Don’t Directly Contribute to Revenue
Not all marketing campaigns directly contribute to sales growth. Some aim to create brand awareness. For example, if you are sponsoring a social event, how would you calculate that it has some contribution to the sales growth?
There is a great possibility that some other factors are contributing to the increase in your revenue and you assume that this new investment was useful.
2. Calculating the Actual Marketing Cost
We know that marketing costs or expenses on a particular campaign are used to calculate ROI on marketing but you have to consider everything that goes into a campaign when calculating the cost.
Sometimes the time taken to initiate a project cannot be converted into value. Other times, you use resources that were already available in a marketing campaign. Should you include that in your cost or not?
For example, your marketing guy is taking $1,000 as a salary and you are spending $5,000 on the production and running of your campaign. Will you add the employee’s entire salary to the marketing cost of the campaign or a part of it?
3. The Challenge of Accurately Defining Social Media Success
Calculating the marketing success of each social media channel is challenging because it depends on how you attribute your success in social media.
You need to develop a deep understanding of the right tools to measure and connect your social media activity with the business goals that you have achieved.
If you want to figure out this, you may have to keep some other factors constant and apply some statistical tools such as correlation to the data that you gather over a certain time.
However, this process again becomes more cumbersome and needs specialists who can help you give the estimated figures
4. Difficulty in Understanding the Full Customer Journey
How long should you measure sales growth as a result of a marketing campaign is also another difficult thing to determine.
Usually, the sales cycles are long. For example, if your sales are happening mostly online and if your leads convert into sales after a long time, you may miss key data about how the sale has happened, which channels have contributed the most, etc.
Also, most of the time, offline conversions happening on calls go untracked. Google analytics can help the online conversion but what if your customer has completed the transaction on a call?
These are all challenges we have to keep in mind when measuring ROI in order to get a complete picture. Next, we’ll cover how to actually measure ROI.
How to Measure Marketing ROI
You can measure marketing ROI by taking the sales growth that happened in a product line and subtracting the cost incurred on its marketing. The results are divided by the total marketing costs.
You’ve observed a sales growth of $5,000 in the last six months after you have launched your social media campaign, which cost you around $1,000, then your ROI would be calculated as under:
Simple ROI = $5000-$1000 / $1000 = 400%
These figures are not based on reality and are purely based on assumptions. In reality, how would you say that the growth you have observed in sales is purely due to your campaign?
Maybe other factors are contributing to the growth. Here comes the role of comparisons with the months before the launch of your campaign. Then you will be using this formula to accurately figure out marketing ROI
Marketing ROI= (Sales Growth – Average Organic Sales Growth – Marketing Cost) / Marketing Cost
Some other measures have a strong relationship with marketing ROI. Some of these formulas are as follows.
Another basic formula utilizes the gross profit received from the number of units sold during the campaign and the marketing investment/cost of the campaign:
Marketing ROI = Gross Profit – Marketing Investment divided by Marketing Investment
You can also replace customer lifetime value with gross profit to calculate market ROI.
Marketing ROI= Customer Lifetime Value – Marketing Cost/Investment divided by Marketing Investment
To determine customer lifetime value, use the following formula:
Customer Lifetime Value(CLTV) = Purchase frequency*Average Order Value * Average Customer Lifespan
ROI Marketing Formula Introduced by HubSpot
HubSpot presents the following formula to figure out your marketing ROI:
Marketing ROI = Number of leads x lead-to-customer rate x average sales price – marketing expenditure) / marketing expenditure] x 100
Now the question is how would you calculate leads to customer rate. For example, you had 100 potential customers or leads and 10 out of them make the purchase, the rate would be 0.10.
Some of the other helpful ROI measures are as follows, however, you have now ROI calculators also available.
This rate helps you figure out the percentage of those users who have completed the sales or any other goal that you have fixed such as registration, filling out form, or app download. Conversion is a good representative of sales or lead.
The formula is:
Conversion Rate = (Conversions divided by total visitors multiply by 100)
Customer Acquisition Cost (CAC)
This ratio will tell you how much on average you need to spend in dollars to acquire a new customer. You can figure out this by dividing your campaign marketing and sales expenses by the number of customers acquired as a result of that spending.
Customer Acquisition Cost (CAC) = Sales and marketing expenses divided by the number of customers acquired during a unit time.
Best Practices of Measuring Marketing ROI
Many things can help you figure out accurately how your marketing ROI. Some of these aspects are as follows:
1. Track the Time you Spent
Building a business and initiating a project is not an easy job.
It’s not all about the money and infrastructure that you use for an event or campaign to be successful. The time it takes to give results also matters.
If you want to know exactly which campaign has benefitted you the most, you have to be vigilant about the time you are dedicating to the purpose.
For example, last year your marketing campaign started exhibiting above 50% sales growth after the third month of the campaign. In this year, if even after five months, your sales are showing a 30% growth rate, this means something has gone wrong.
Just for the sake of understanding, we have assumed that the expenses are equal in both years. Here, the time tracking will help you get a glimpse of trends.
Tracking time will also be helpful for you to properly figure out the expenses on content marketing, such as hours spent by the bloggers in drafting content. It also helps analyze how much effort has gone into the project.
2. Track Your Total Expenses
Tracking the total expenses or your marketing cost is critical in order to calculate marketing ROI.
How will you track your total expenses?
You will add up all the dollars that you spent to complete the marketing campaign. For example, you have hired an SEO specialist to make your business more visible to the users.
His salary will be your expense spent on this digital marketing project. If you have registered for a premium version of an SEO audit tool, the payment that goes for this will add up to your digital marketing expenses.
In case you are not keeping a track of all the associated expenses, you will not be able to accurately figure out how much the SEO effort has benefitted you over a certain period.
3. Track What You’re Promoting
Certainly, you need to keep an eye on the product/ service, or idea that you’re trying to promote.
Only by doing this will you be able to see growth, stagnancy, or decline in the product purchase over time. The graphs and charts will show you that you are selling more units of your product since you have launched this campaign.
Similarly, if you see that there is no reasonable growth in the buying behaviors or product sales, then you may think that you need to revise the marketing strategy because there is no or less than expected ROI.
4. Track Non-Financial Metrics
It’s not always the monetary returns that matter for various companies in their initial phases of establishments. Some companies merely look for more and more subscribers and followers for their products/ services.
When it comes to social development campaigns, it’s more about creating the awareness amongst masses. These non-financial metrics can be useful in the future and materialize certain hidden opportunities.
Therefore, keeping track of these sorts of metrics is equally important.
Summary & Takeaways
In this article, we covered:
- An overview of marketing ROI
- Examples of marketing ROI
- What kind of ROI you should expect
- Challenges of measuring ROI
- How to calculate ROI
Marketing ROI is the key performance indicator for businesses, both big and small.
This article breaks down marketing ROI and explains how to calculate it.
With the introduction of more digital analytical tools and calculators, it has become easier for marketers to develop an understanding of all the associated terms. Marketing ROI is important for the marketing department to justify its expenses in marketing campaigns and to remain competitive.
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