Marketing ROI: Definition, Measurement & Improvement

Did you know, only 35% of marketers said that understanding the ROI of their campaigns is “Very Important” or “Extremely Important.” What?!

Measuring your ROI is the definite way to assess whether your marketing efforts are working and where to allocate budget. So to hear only 35% of marketers think the ROI of their campaigns means we should be discussing why it's important in addition to how to calculate your ROI more often. 

But don’t worry, we’re on it. In this blog we provide the ins and outs of marketing ROI, it’s significance, and examples of how to use this measurement tool to your benefit.

What is Marketing ROI? 

Marketing Return on Investment (ROI) is a term used to describe the profitability of an organization’s marketing efforts.

For every $1 you spend, how much are you generating back? This is the question that you are trying to answer by calculating your marketing ROI. Given that one of the core purposes of marketing is to drive sales, it is critical to understand the relationship between your costs associated with marketing and its yield. The answer will help you determine if your marketing strategy is working and which marketing activities are most effective.

How is Marketing ROI Used by Marketers?

Knowing the return on investment of a given marketing program will help you determine where to invest your marketing budget in the future. For this reason, one of the questions you'll want to be asking yourself is "what was the return on investment of that campaign?"

Here are the different ways proving ROI can help marketers:

Justifying Spend

In order for the C-suite to allocate resources and budget to your team or campaigns, the current spend needs to be justified. To do this, marketers calculate the ROI of their marketing efforts.

If you need a little extra help, share this statistic with your manager: Marketers who compute their ROI are 1.6 times more likely to be awarded higher budgets for their marketing activities.

Distributing Marketing Budgets

You need to know how and where to properly distribute the budget, which is why understanding the revenue generated from different campaigns and channels is helpful.

For example, if your paid social campaigns are generating a high volume of qualified leads, you should probably 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. 

Measure Campaign Effectiveness

Measuring ROI establishes a baseline for campaign success that serves as a reference for any future marketing effort and spend. Analyzing your results allows you to gauge the success of each campaign so that you can adjust your team's efforts accordingly. You can use these insights to forecast the impact of individual campaigns on revenue growth.

Competitor Analysis

Marketing inherently involves analysing your competitors; whether it’s identifying what content they are producing, what channels their on, or how many customers they have, it's important to know what they are up to. When we talk about tracking the marketing ROI of your competitors, we mean how their brand is performing within the industry.

Calculating Marketing ROI

The objective of the ROI calculation is to help connect the dots between all marketing efforts and revenue. There are a different way to calculate ROI, but the core ROI formula is pretty simple:

(Sales Growth - Marketing Cost) / Marketing Cost = Marketing ROI

Depending on your industry and customer segments, tracking ROI on certain types of tactics may be easier said than done. Traditional methods such as print media and billboards are usually estimates, compared to email marketing, pay-per-click ads, or other digital marketing tactics.

Another common way of representing marketing ROI data is in the form of revenue to cost ratio, also known as an efficiency ratio, which represents how much an organization needs to spend to earn a dollar. To put it simply, if the 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 as low as possible. 

Calculating customer lifetime value (CLV) is also important, as it gives insight into that specific relationship with the company and a long-term ROI across the consumer’s lifecycle. Here is the formula to follow: 

Customer Lifetime Value = (Retention Rate)/ (1 + Discount Rate/ Retention Rate)

If your industry allows for it, your marketing efforts will ideally contribute to 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.

Remember: Retaining customers is always cheaper than obtaining new ones!

What is a good ROI?

Good ROI is ultimately subjective and will depend on your needs and goals as a company. Many large and well-known companies strategically choose to pursue marketing campaigns that will yield them extreme negative ROI with the goal of dominating consumer awareness and market share. Others may need distinct profitability numbers from their marketing strategies. Some marketing campaigns may even have a goal that is not even directly monetary, such as heightened social media engagement. 

The first step in assessing a target ROI is understanding what the goals of a specific marketing campaign or tactic are. And regardless of what the goal is, understanding your ROI will keep you on track for it and ensure the marketing activities are contributing towards the project scope as planned.

Marketing ROI Best Practices & Examples

E-commerce company using a podcast promo code

For one example of calculating ROI, we can look at one type of marketing that has gained significant traction in the e-commerce world over the last few years — podcast advertising. No matter the podcast, these ads generally follow a standard format where the host will read the pitch, followed by a call-to-action to visit the website with an attributed URL (www.company.com/mypromo) or use a specific code at checkout for a deal. Both of these serve the purpose of allowing the company to know how many specific leads they are generating and understand the revenue that comes from those leads. E-commerce platforms such as Shopify make these analytics readily available, so companies even rank different referral sources and determine which works best for them. 

In this 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 the newsletter list, potentially leading them to be long term customers? Future sales by them could additionally be factored into this ROI formula.

Tech giant burning cash

On the opposite side of the spectrum, we also discussed companies that may aggressively burn cash for the sake of rapid consumer awareness or market share growth. Perhaps a big venture-backed app company has a $3 million annual marketing budget and doesn’t expect to be profitable for 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%.

Comprehensive ROI tracking

The possibility of being able to allocate every specific marketing expense to a revenue number may not always be realistic. Your company may have multiple campaigns running at the same time across different types of media. In this case, you may choose to analyze your marketing ROI with a more comprehensive approach — this could be done on a monthly, quarterly, or annual basis. 

Following the same formula as above, you would take the total sum of marketing expenses paid in the tracking period and calculate that against the total revenue in the period. Although this comprehensive approach may not be as specific as the e-commerce example, it can still provide a strong indication of whether your marketing efforts are on the right track.

So, the point is that understanding, proving, and improving your marketing ROI will not only help the effectiveness of your marketing strategy and campaigns but gives insight into digital marketing trends. Which is a whole other important topic. Take time to research digital marketing trends and statistics in relation to marketing ROI — trust me, it works!

 

Hopefully, now you have a clear understanding of what marketing ROI means as a metric, what actions to take to showcase your efforts.