It’s a fact that companies spend a lot of time and money tailoring their marketing strategies, and it’s equally true that some of them don’t gauge the profitability of their efforts correctly.
It’s a mistake that can lead, for instance, to allocating a lot of resources to strategies or marketing moves that don’t generate a profit or to not spend enough on the ones that are getting better results.
So, measuring your return of investment (ROI) is of paramount importance. The problem lies in the fact that doing so effectively is easier said than done!
You see, there are different ways and formulas to calculate marketing ROI and several factors to keep an eye on if you want to do a good job about it. Don´t worry, though- we´re here to help!
In this guide, you´ll learn more about marketing ROI, the different formulas and metrics you can use to measure it, and get some handy tips to measure the monetary return of your marketing strategy.
Let’s get started!
In a nutshell, ROI measures the revenue generated in connection with the spending made for any specific marketing action. The long and short of it is that you use it to determine if the returns justify the inversion.
Usually, it´s expressed as a percentage; the greater this percentage, the more profitable your marketing efforts are.
It´s essential in marketing because it allows you to know how effective your marketing activities are and where you are falling short. Moreover, you can (and should!) use this information to guide your decision-making moving forward.
For instance, if a specific strategy is cost-effective for your company, you can double down your investment there while reducing costs applied to a not-so-effective one.
Here’s a basic marketing ROI formula you’ll see thrown around after a quick Google search:
[(Sales Growth – Marketing Cost) / Marketing Cost] x 100 = Marketing ROI Percentage
However, effectively measuring and using marketing ROI is a bit more complicated than just that formula. There´re several factors to have in mind, and this formula doesn’t take them all into account, let alone show the real impact of a marketing move’s performance.
By the same token, it’s worth mentioning that when you calculate ROI in digital marketing, the aspects in consideration differ from those of ROI in traditional advertisement 😉
Luckily, there are a number of different ways to measure marketing ROI and elements to consider when doing so. So let’s take a closer look at the ones you’ll probably find most relevant.
Key performance indicators (KPIs) refer to a set of metrics used to evaluate how effectively a company is achieving key business objectives.
The KPIs you use for your ROI calculation will vary according to the marketing action or channel used. For instance, the ones used to evaluate your email marketing ROI will not be the same as those used to measure your content marketing ROI.
Therefore, when it comes to calculating marketing ROI using KPIs, you’ll have to determine the right KPIs to measure each campaign or marketing strategy accurately.
Put simply, cost per lead (CPL) is a metric that tells you how much you are paying for each new “lead” – someone who expresses interest in your offerings by taking action, like subscribing to your newsletter or blog, downloading your eBook, or similar.
When you calculate your cost per lead, you can put a monetary value on your prospects. This way, you´ll have an accurate picture of how much money it takes to acquire new ones.
To calculate cost per lead, divide your total spend in a determined marketing effort by the total number of leads obtained through it.
Total spend / Leads acquired = Cost per lead
Now, going a bit further down the marketing funnel, let’s talk about cost per acquisition (CPA).
This metric allows you to know how much it costs to acquire a paying customer. It’s another vital indicator to measure your marketing ROI that can be used in different paid marketing activities, such as social media ads or PPC.
To calculate cost per acquisition, divide your total spend in a determined strategy by the number of sales generated.
Total spend / Sales generated = Cost per acquisition
This metric compares a company’s expenses to its earnings – that is to say, the cost of revenue to the total revenue. The former includes manufacturing, shipping, content production, and marketing costs, among others. The latter counts the total earnings generated from sales.
To calculate the cost of revenue ratio, divide the cost of revenue by the total revenue.
Cost of revenue / Total revenue = Cost of revenue ratio
For example, if a company spent $600 on a Facebook ads campaign and the revenue generated by it was $1500, the ratio will be 0.4. This means that for every $4 in costs, the company generates $100 in revenue.
Marketing spend refers to all the money spent by a marketing department on marketing-related activities, like SEO, social media, and paid advertising, to name a few. Understanding how much money you´re using for the different areas of your marketing strategies enables you to make better and wiser financial decisions.
You´ll have to make sure you track your ROI in digital marketing (online) and traditional marketing (offline) separately and combine both for the full picture.
This refers to the rate at which your website visitors take the desired action compared to the total number of visitors. Knowing the specific action you want them to take and the number of opportunities there are for that to happen will help you to get an accurate conversion rate estimate.
To calculate the conversion rate, divide the total number of conversions by the total number of visitors.
Total conversions / Total visitors = Conversion rate
Now, picture this: 200 people have visited your website in a week. 12 of them subscribed to your webinar, 5 to your newsletter, and 28 made a purchase.
If we use the formula mentioned above, we´ll get the following results:
As you can see, these different actions have wildly different results, and all can be equally s relevant depending on the decisions you are trying to make. Therefore, make sure you measure each conversion separately and using terms that make sense to your situation.
And just like that, we’ve arrived at the burning questions. So let’s get down to brass tacks:
Most experts agree that a good marketing ROI sits around a ratio of 5:1, which means a $5 return for every $1 spent. Anything below 2:1 is considered unprofitable, and 10:1, where you get $10 for every $1 spent, is often considered an outstanding ROI.
The reasoning behind the usual ratio is that 5:1 fits nicely in the middle of the curve, so it represents a good average ratio. However, any given ROI that is good for a company may not be that good for another.
So, the most accurate answer is that it will vary depending on the industry, company needs, and marketing strategy. While it´s okay to use 5:1 as a guideline to shoot for, make sure you also bear in mind the factors and standards that are unique to your industry and situation.
Once again, marketing ROI formulas can be a bit overwhelming, so let’s dive into a handful of best practices you might find useful to make that process as smooth as possible.
Due to the multiple marketing channels and available data out there, falling into the trap of tracking the wrong metrics is a common mistake. Usually, this also happens because people don’t define or focus on the main goal of their marketing efforts.
Suppose you want to calculate your content marketing ROI, and your main goal is that people visit your blog. Cost per lead or conversion rate are some of the most appropriate metrics you can use, while costs per acquisition won´t give you the information you need.
Therefore, before you start measuring marketing ROI, it’s vital to know the goals of your strategies in order to use the appropriate metrics.
Costs can be anything from staff salaries, PPC advertising pricing, video production companies, marketing tools, and everything else in between. Make sure you include it all!
This way, the results of your marketing ROI will be not only accurate but can also be a reliable guideline of what you should do next.
As for the benchmarks, we’ve discussed above that they vary depending on the industry, the channel used, and so on. So it’s important to take the time to determine what yours are. This way, you´ll be able to identify what´s a good ROI for your business.
Doing a good job while collecting and analyzing data for ROI measurement is paramount. Luckily, there are plenty of marketing ROI calculators that can give you a hand on that matter, like Google Analytics, BuzzSumo, EmailMarketingFX, and SEMrush.
Choosing the one that better adapts to your campaigns and marketing channels is advisable, as well as double-checking your numbers and data along the way.
For example, if you want to measure your email marketing ROI, you can monitor your campaigns with EmailMarketingFX. Similarly, if you want to track your SEO, you can use SEMrush that specializes in the subject.
Congrats, you´ve made it to the end of this piece.
As we´ve seen, measuring your marketing ROI is a step you can’t skip. It provides you with a lot of useful data to make your future strategies more cost-effective.
Sure, it’s a complex task, but one that’s well worth the hassle and one you are hopefully now better geared to accomplish!
So, are you ready to start crunching the numbers and improve your strategy? Best of luck!