Do you know how to calculate marketing ROI? Simply stated, Return on Investment (ROI) is a way to ensure that an investment makes good financial sense. In the context of marketing, it’s a way to ensure your organization’s marketing efforts are making a positive business impact financially. Marketers sometimes refer to this as MROI (Marketing Return on Investment) or ROMI (Return on Marketing Investment). We’ll stick with ROI, knowing that we’re talking about marketing ROI. Although the principles outlined in this article apply to organizations of all sizes, it was written with the small business or non-profit leader in mind.
As the name suggests, ROI is a rather simple calculation which determines the “return” (financial gain) on an “investment” (financial expenditure). Here is the general formula:
(Net Income / Cost of Investment) x 100 = ROI
For example, if someone earned $100 after expenses (net income) on a $50 investment, they would have doubled their investment. Multiplying by 100 helps to convert that to a percentage, so it would be a 200% ROI.
Marketing ROI Formula
Applied to marketing, we can adjust the formula as follows:
(Sales – Marketing Cost) / Marketing Cost x 100 = Marketing ROI
For example, if a small business generates $150K in sales with a $50K investment in marketing, then the ROI would be (150K – 50K) / 50K x 100 = 200% ROI. As you can see, the formula itself for ROI is very straightforward. So why is it so hard to track marketing ROI?
Difficulties in measuring marketing ROI
Unlike other types of business investments, marketing investments are not as easy to track. Here are some of the typical difficulties in measuring marketing ROI.
- Marketing data is disconnected and dispersed. The modern marketer has to contend with website analytics, social media analytics, search engine results, pay-per-click ad spends, email campaigns, and other forms of data. Gathering that data and linking it all up is not something the average small business leader knows how to do.
- Marketing data isn’t always “clean”. If someone goes to a website to buy something after following an advertising link, leaves, and then comes back – how do we attribute the sale? Was the sale the result of advertising or not?
- ROI tends to ignore other positive impacts from marketing. A great example of this are social media analytics. How does a Like on Instagram equate to marketing? ROI really doesn’t capture that, other Key Performance Indicators (KPI) like brand reach do a better job of measuring social media effectiveness.
- Lack of differentiation between marketing and sales. This is a classic blunder that many business leaders make. There is a tendency to jump directly to the bottom line sales number, without considering each step of the marketing and sales funnel. A company may have a sound marketing plan, but need a fresh campaign to convert more prospects to sales. Instead of scrapping the entire program, maybe it just needs a tweak.
- Lack of realistic expectations. Marketing is big business and its impact tends to be exponential, not linear. In other words, putting a few thousand dollars into a multi-million dollar market is not likely to make a dent. For the small business leader, having a niche and staying focused on a more winnable situation is likely to have better results.
- Marketing is synergistic. Often times, it’s hard to attribute a sale to a specific marketing campaign or activity. Word-of-mouth referrals often visit your website before contacting you. What impact did the website have on the sale? How does one measure that for ROI? Unless someone specifically clicks on an advertisement, email link, or social media post it’s hard to attribute that sale – yet, the combined synergistic impact of marketing probably contributed to the sale. Marketing attribution will be the subject of a future blog post.
Just because ROI is difficult to measure, doesn’t mean you should ignore it. Quite the contrary, it provides the most direct measure of marketing effectiveness. When should you use it? Use ROI to help guide new marketing initiatives and campaigns, where it’s easier to associate the revenue and track the expenses. When should you not use it? It’s probably best not to measure the ROI of ongoing baseline marketing activities that keep the brand alive and are hard to directly attribute to sales.
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