Return on Investment (ROI) is an expectation of any business function. After all, if the company isn't making more money than the cost of business operations, they won't be around long.
However, marketing ROI has been notoriously hard to measure. This is because many marketing efforts are focused on nebulous concepts such as brand awareness and social media reach, rather than sales.
What is Marketing ROI?
In marketing, ROI is the measured impact of marketing efforts or campaigns on sales or profits. It is a calculation that compares the cost of a campaign (materials, advertising, in-house and agency spend, etc.) against sales, growth or profits.
How Is Marketing ROI Used?
Business leaders use marketing ROI to determine the allocation of funds to the marketing department. And to measure the success of the marketing effort. It can also be used by marketing leadership to justify spending on different efforts or campaigns. And to set baselines so that success can be measured in a quantifiable way.
Marketing departments may need to justify the money they spend on a specific campaign or ask for their actual budgets. To prove that a marketing project is worth the investment, there have to be results. Whether that's an increase in social media followers or web traffic or increased in sales.
Set Marketing Budgets
Department budgets are generally determined and allocated on an annual basis. Once the department budget is set, it's up to the department leadership to disperse the funds toward different projects or campaigns. Several areas of a marketing department require funding. Businesses often have advertising, website maintenance, content creation, printing and materials costs. To prove that each area deserves its chunk of the budget, they may rely on ROI as a measurement.
Any project needs a way to measure its baseline starting point, progress made, and to define success. In marketing, that may be social media metrics or website clickthrough rates. By setting a baseline, it's possible to measure improvement along the way, thereby proving ROI.
Analyze the Competition
Sometimes, measuring your own level of success doesn't show the whole picture. That's where competitor analysis comes in. By measuring the ROI of your competitors in a specific industry, you can start to see trends that go beyond your own company's bottom line.
How Do You Calculate Marketing ROI?
Calculating marketing ROI can be as simple or as complex as you want it to be. It all depends on how much you're trying to measure and accomplish.
SETTING A BASELINE
The first step in any measurement effort is to gauge where you are starting from. After all, how can you define success if you don't know how to measure improvement?
Defining a baseline will depend on your business and what your goals are. To find your baseline:
Use your current metrics
Review the metrics over the past quarter or fiscal year
Compare your current metrics to where you were at this time last year
At its most basic, ROI is calculated by subtracting marketing cost from the sales, then dividing by the marketing cost. To get an ROI percentage, multiply that number by 100.
[Can we get a visual example?]
However, this can be seen as an oversimplification since it ties all sales to marketing efforts and doesn't account for organic growth.
The more detailed you can be in your tracking and metrics, the more accurate the picture painted by your ROI will be. Some of the additional factors to track include:
Total campaign costs
Hours per project from inception to completion
Brand awareness metrics
Key Performance Indicators
Additionally, Key Performance Indicators (KPIs) can also play a role in better describing the impact of digital marketing efforts. Digital marketing, especially brand awareness efforts or social media campaigns, may not lead directly to sales. But they have other metrics that can be used to show progress.
KPIs to measure as part of ROI include:
Social media followers
Social media reach
Defining Success with ROI Metrics
Successful ROI will look different for every business and depends on how many metrics and KPIs you are using in your calculation. Typically, an ROI ratio of 5:1, or five times the income from sales versus the cost of the marketing effort, is considered good. Anything above that is great! And anything less than that may still turn a profit but is not considered an out-and-out success.
It's important to keep in mind that ROI calculations are not made to measure short-term success, such as whether a single post on social media resulted in sales. Instead, it should be used to measure efforts over an extended period of time. Then it can account for things like increased brand awareness and the many touchpoints along the customer journey.
Want to learn more about getting better marketing results? Get in touch with us to find out how we can help improve your ROI.