Businesses are interested in numbers. They’re interested in sales, revenue, and profit. Because this is what matters at the end of the day. Proving return on marketing investment is an essential metric that shows the profitability and success of the campaign. You must know what is ROI in marketing, why it is important, and how to calculate and improve it.
Measuring the ROI of demand generation initiatives is the top priority of 44% marketers. And 35% of marketers say that understanding the ROI of their marketing campaigns is very important for them. This is because your marketing ROI influences marketing spend, marketing strategy, and everything else.
This article covers everything you need to know about ROI in marketing:
What is ROI in Marketing?
Return on investment (ROI) is a metric that is used to determine the profitability of a marketing campaign. The metric shows the return on marketing investment. It is a percentage that tells you how much you make per dollar investment on marketing:
For example, ROI of 5% means you earn 5% for every dollar spent on marketing. If you invest $10 in marketing, you’ll earn $0.5 (5% of $10), and if you invest $100, you’ll earn $5.
Here is the formula to calculate marketing ROI:
ROI = (Net Profit / Total Marketing Cost) x 100
You’ll get a percentage that will be your marketing ROI.
How to Calculate Marketing ROI
Calculating ROI isn’t a big deal. You can easily do it if you have access to the right data. Here is the formula to calculate marketing ROI:
You need the following information:
- Total profit or income generated by the marketing investment
- Total marketing investment that includes all types of marketing cost including administrative cost, tools, etc.
You can calculate the marketing ROI of all the marketing spend or for specific campaigns too. When calculating the ROI of a marketing campaign, you’ll need the income generated and the cost associated with that campaign.
And this often gets complicated because it is hard to identify specific campaign costs. For example, marketing salaries are difficult to associate with a single campaign.
You can, however, use estimations by distributing overall marketing cost into individual campaigns. This will help you calculate accurate campaign ROI.
Use the same technique to calculate marketing channel ROI.
ROI Vs. ROAS
Most often, the return on investment (ROI) is compared with the return on ad spend (ROAS). These are two related but different metrics that measure different variables.
ROAS measures the return on ad spend specifically such as online ads. Here is the formula to calculate ROAS:
ROAS doesn’t use net profit rather it simply uses revenue from ads (or a specific ad campaign). This makes ROAS an advertising-specific metric that specifically measures the performance of online advertising campaigns.
ROI, on the other hand, focuses on your business as it uses net profit which is a broad metric. This gives you a better picture of how marketing efforts contribute to your organization. This makes ROI a superior and broader metric than ROAS.
ROI Vs. ROE
Not too often, but ROI is also compared with the return on equity (ROE).
ROE determines the financial position of a company. It measures how effectively a company is using its assets to earn profits. And it shows the overall company’s strength and how it uses ownership stake. It is used to find the attractiveness of a company in terms of investment:
ROI looks at the profitability of an investment (in this case marketing investment). It isn’t as broad as ROE that is used to see how effectively management is using shareholder’s money (overall investment) to generate profitability:
ROI is an internal metric. Management uses it to see how effectively its team is using the allocated marketing budget. On the other hand, shareholders use ROE to see the overall profitability of a company.
Why ROI is Important in Marketing
Marketing ROI is crucial for several reasons. As a marketer, you have no choice but to measure ROI to prove marketing effectiveness and performance. Here are the key reasons that make marketing ROI an essential metric:
1. Marketing Effectiveness
There is no other better way to measure the effectiveness of your marketing efforts than ROI. It is the most impressive and authentic way to find and report marketing performance.
Perhaps the biggest benefit of tracking marketing ROI is that you can compare it with the previous year’s ROI and see how well you performed. You can set marketing targets in terms of ROI. For example, you can set a target to double marketing ROI this year.
This metric makes marketing understandable to non-marketing individuals as well.
2. Justify Spend
Marketing ROI is a perfect way to justify the marketing budget. It helps you show how you used the marketing budget and what was its outcome. It is something stakeholders are interested in. They’re not interested in leads and brand awareness, rather they want to see numbers.
If you can’t show a quantifiable output of your marketing efforts and can’t justify the marketing budget practically (not just theoretically), you’ll be in hot water.
Marketing ROI will rescue you any day.
3. Identifying Best Marketing Channels and Campaigns
Optimization is a crucial step in marketing that involves improving the performance of marketing campaigns and optimizing marketing spending too. This requires a comparison of all the marketing campaigns and channels. ROI is the best metric that provides you with a standard metric that helps you compare the performance of individual campaigns.
You can identify the best campaigns and marketing channels (and vice versa) to optimize spending. And this leads us to the next benefit of marketing ROI…
4. Marketing Budget Allocation
You need to have robust data on the top-performing and poor-performing marketing channels so that you can allocate the marketing budget appropriately. ROI gives you this data.
What is ROI in marketing and how to calculate it accurately is just the basics. Optimizing and improving marketing ROI are the two key tasks that you must be an expert in to stay ahead of your competitors. Anyone can calculate marketing ROI, that’s not a big deal.
As a marketer, you must be able to improve ROI and this is something that comes with experience. For now, make sure you focus on nothing but ROI to gauge marketing performance.
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