Measuring marketing ROI is a definitive way to assess whether your marketing efforts are working, what needs to change, and where to allocate budget. Here's how to calculate marketing ROI, the marketing ROI benefits, and examples for how to apply this important metric to different marketing initiatives.
Table of Contents
What is Marketing ROI?
How is ROI Used by Marketers?
How to Calculate ROI
What is "Good" ROI?
Marketing ROI Examples
What is Marketing ROI?
Return on Investment (ROI) is a business term used to describe profitability: the amount of money you spend on a campaign or other initiative compared to the amount you earn from that campaign. An ROI formula is used to calculate profitability, and ROI can be applied to all different marketing efforts.
For every dollar you spend, how much are you generating back? This is the question that marketing ROI calculations try to answer. Given that one of the main goals of marketing is to drive sales, it is critical to understand the relationship between your marketing costs and the yield of your marketing activities. The answer will help you determine if your marketing strategy is working and which marketing investments are most effective.
ROI can also be thought of as a way to allocate time and energy balanced against short and long term goals. For example, if the return on the time it takes to research a new vender isn't worth it in the short term, based on other priorities for your team, then perhaps it's a project that can be delegated to someone else, or pushed to a later date.
How is ROI Used by Marketers?
Here are a few different ways that proving ROI can be helpful to marketers:
Justifying spend
In order for the C-suite to allocate resources and budget to your team or campaign needs, you need executive buy-in. And demonstrating consistently positive ROI is one of the best ways to justify your proposed budget needs.
Tip: Download the Marketers Guide to Unified Reporting
Distributing marketing budgets
You need to know how and where to properly distribute the budget, once it's been approved. So understanding the revenue generated from different teams and channels is helpful.
For example, if your paid social campaigns are generating a high volume of qualified leads, you may want to consider allocating more budget to your paid social program. This isn’t to say that if a program is not performing well, the budget shouldn't be allocated. Different programs have different marketing KPIs and every marketing strategy is different.
Measuring campaign effectiveness
Measuring ROI establishes a baseline for campaign success that serves as a reference for future marketing spend. Analyzing your results allows you to adjust your team's efforts accordingly and you can use these insights to forecast the impact of upcoming campaigns on revenue growth.
Competitor analysis
An important tool in marketing involves analyzing your competitors; whether it’s identifying what kind of content they're producing, what channels they're on, or how many customers they have. When we talk about tracking the ROI of your competitors, we mean how their brand is performing against other competitors in our same industry.
How to Calculate ROI
The objective of ROI calculation is to connect the dots between marketing efforts and revenue. There are numerous ways to calculate ROI, but the basic formula is simple:
(Sales Growth - Marketing Cost) / Marketing Cost = Marketing ROI
Put another way: Sales minus marketing cost, divided by marketing cost = Net ROI
Another common way of representing marketing ROI is in the form of revenue to cost ratio, also known as an efficiency ratio. This calculation represents how much an organization needs to spend to earn a profit. Put simply: if your marketing expense is $40 and the revenue yield is $50, the efficiency ratio is 40/50, or 80%. The goal of any company should be to have this percentage be as low as possible. A lower efficiency ratio means your spending less and making more.
Calculating customer lifetime value (CLV) is also important, as it gives insight into long-term ROI across the consumer lifecycle. Here is the formula to measure CLV:
Customer Lifetime Value = (Retention Rate)/ (1 + Discount Rate/ Retention Rate)
Your marketing efforts will ideally contribute to new customers becoming returning customers, which will significantly add to your ROI. A customer that purchases once from you will have a return of X, but if that customer purchases 3 more times they will have a return of 4X.
What is "Good" Marketing ROI?
Good ROI is ultimately subjective and will depend on the specific goals your marketing team has set. Negative ROI from a financial standpoint, could be the result of positive ROI when it comes to brand awareness. After brand awareness and increased market share is established, you can turn your attention to generating more sales from your marketing efforts, leading to a positive financial ROI.
Brand awareness is harder to measure, but some metrics that are strong indicators include: UGC, social media followers, social engagement, and email sign ups.
Marketing ROI Examples
While the formula for ROI is straightforward, measuring it accurately has been a thorn in marketing teams' sides for decades. Correct and quantifiable attribution for the business revenue that marketing contributes can be incredibly difficult to track. Then throw in more qualitative marketing goals, like brand awareness and ROI becomes even more nebulous.
As digital marketing, email, paid and organic social, and other forms of advertising have grown in sophistication, it's gotten easier to calculate marketing ROI, but it's still not an exact science.
Here are some examples of marketing ROI for the digital age that can help form a complete picture of all the hard work your marketing team puts in to help grow the business:
Email marketing
Email is a tried and true avenue for reaching new and existing customers. It's a great way to offer deals, promote new products, and move inventory. Email subscriber numbers and activity are also a great indicators of consumer trends and interest. Measure email marketing ROI in a few different ways: by weighing the time it takes to create and send an email vs creating and posting a blog post for example. You could also track the sales attributed to email subscribers to determine if you should invest more or less time in your email strategy.
Another way email marketing factors into your marketing ROI is on the advertising side. You might use some marketing budget to buy a sponsored post in another company's email newsletter, in order to get in front of a new audience. Using a tracking link on the ad, you can calculate how many new customers you gain, and this will factor into whether or not you buy the spot again in the future.
Increasing brand recognition
As we mentioned above, companies that may burn cash for the sake of rapid consumer awareness or market share growth. This is the classic measuring short term hardship against long term gains, and is very common amongst startups.
Perhaps a venture-backed app has a $3 million annual marketing budget and doesn’t expect to be profitable for a couple years, but has begun to generate some revenue ($250,000) through in-app purchases. The calculation here would be $3,000,000 - $250,000, yielding a net negative marketing ROI of -$2,750,000, or -91%.
Podcast ads
A type of marketing that has gained significant traction in the world of e-commerce is podcast advertising. These ads generally follow a standard format and call-to-action to visit the website. You can track the leads generate through UTM links or promo-codes.
Let's take an example
Say a T-shirt company pays a podcast $500/month for two ad reads. They are able to track their traffic and see that the ads have directed 62 leads to the site, and of those 62 leads, 7 made a purchase of $80, yielding a revenue of $560. The calculation would be (7 x $80) - $500 = $60.
Plugging these numbers into the marketing ROI formula cited above, we get (560-500)/500 for a marketing ROI of 12%.
It doesn’t have to stop there either. What if 3 of the 7 purchasers signed up to be on your newsletter list, encouraging them to become longtime customers? Potential future purchases by them could additionally be factored into this ROI formula.
Understanding and proving marketing ROI not only helps the effectiveness of your marketing strategy and campaigns, it provides invaluable insight into industry and consumer trends.
Hopefully, now you have a clear understanding of what marketing ROI means as a metric and how to calculate it! Let us help you prove your ROI as a marketing professional! Fill out the form below to get a free tour of our platform.
