Are you spending money on marketing channels like blogs, social media, podcasts, or videos? It’s hard to tell if you’re getting your money’s worth without knowing marketing ROI.
Determining your ROI from marketing channels is challenging. Why?
Because, unlike things like CTR or Impressions — most of the time you can’t tell how your campaign is doing in real-time when it comes to total ROI which will probably require a bit of calculation.
There are of course certain campaigns, like selling a digital product, where the cost of goods sold, shipping costs, etc. don’t get mixed in and you can get a very close estimate of what your ROI is right from your advertising analytics. No calculator needed.
For everyone else, some math is probably going to be necessary.
First, what is ROI?
ROI, or Return on Investment, helps determine if your investment or expenditure is worth it – and if so, the rate at which you are getting a return.
So, what is Marketing ROI?
Marketing ROI is the return on investment on your marketing campaign or expenditure. Demonstrating your marketing’s impact on revenue or growth. Simply put, it informs you whether your marketing spend is worth it or not.
Calculating your marketing ROI
There is a marketing ROI formula you can use to calculate your ROI on a marketing campaign. But you need a bunch of information to use it.
Number of leads: How many people are interested?
Lead-to-customer rate: How many become your customers?
Average sales price: How much did you get for each sale?
Cost or ad spend: How much do ads cost you?
If you have all this information, plug the numbers into the marketing ROI formula.
Marketing ROI Formula
ROI = ((number of leads lead-to-customer rate average sales price)- cost or ad spend)cost or ad spend100
What’s a good marketing ROI ratio?
What is considered good or normal can swing drastically depending on the industry. For example, a 500% or 5:1 ratio might be good for a retail store spending a $1 to make $5, but out of reach of a real estate agent selling homes with a $200k commission.
How you calculate your ROI due to the nature of your business is also a crucial factor as well. The numbers above assume a one and done sale – but what if it isn’t?
What if my ROI is in the negative?
It’s possible that there is an issue that needs to be troubleshooted with your ad or product. But – there are a lot of industries out there that operate on a negative upfront ROI as well.
Negative upfront ROI can be seen in greatly performing ads, on businesses that don’t make up their profit on the first sale.
For example, cell phone providers are an excellent example of this. It’s expensive to acquire customers. The average is somewhere around $350-400 and they are most definitely not making that in the first sale.
In situations like that, where a customer is expected to make repeating transactions, we would start to look at the customer’s Life Time Value (LTV) or work with our client to determine another value that represents how much a customer is worth to their business.
There are many different ways to calculate Marketing ROI.
The above formula doesn’t account for things such as negative upfront ROI, or the lifetime value of the customer. How you calculate your ROI may be totally different from another business, and even one in the same industry.
So it’s very hard to do an apples-to-apples comparison of another business, and you shouldn’t be discouraged if you run your numbers and they come out differently than what might be considered your industry standard.
Dollars aren’t everything when discussing marketing ROI…
Sometimes a campaign is just good, and either you don’t need the numbers to quantify it or the numbers become irrelevant.
Let’s say you are running an email marketing campaign for $1000/month that serves up information to your existing customers. The information this email campaign is serving is stuff that clogs up your support lines, educating your customers about your product or service so you don’t need to.
As a result, you need to provide drastically less support and in the process are improving experience and (likely) customer retention.
The result? Less headaches and more money. While ROI may be a hard to quantify number for this calculation or even appear to be in the red — you’re glad it’s running even if it doesn’t always generate enough direct sales to cover the cost of running it. It’s still a win.
It’s not all about the numbers…
These types of measurements inform you about how your marketing campaign is doing in the short term. But you also need to consider the long-lasting impacts your marketing could bring to your business—think lead generation, brand awareness, customer Life Time Value, and many more.
And as we learned today, the dollar value of an upfront sale isn’t everything.
Don’t always focus only on immediate sales, instead look to achieving goals with long-term rewards to get your money’s worth on marketing.