What is ROI in Marketing and How Do You Calculate It?
06/01/2023
What is ROI in Marketing and Why is it Important?
Marketing ROI (Return on Investment) is a metric that measures the effectiveness of a marketing campaign by comparing the revenue generated to the cost of the campaign. It is an essential metric for businesses to determine whether their marketing efforts are profitable or not and is also a way to compare the effectiveness of one campaign versus another.
Knowing the true ROI of marketing investments is now becoming mission-critical for brands as they come under more pressure from finance teams seeking cost savings. Marketers who use advanced marketing measurement can fend off this pressure more effectively and defend their budgets from these finance pressures. These marketers don’t have “cold feet” and use their advanced measurement capabilities to avoid damaging cuts.
How is ROI Calculated in Marketing?
Calculating Marketing ROI can be challenging because it requires tracking multiple variables such as sales revenue, marketing expenses, and customer acquisition costs. It also requires that the revenue generated by a marketing campaign be tracked and assigned to that specific campaign. This is becoming much more difficult and much less accurate as more and more tracking data is lost due to consumer data privacy changes on major devices and browsers.
The formula for calculating Marketing ROI is:
ROI = Revenue from the Campaign / Cost of the Campaign
Sometimes this is also known as Return on Ad Spend, or “ROAS” which similarly calculates the revenue driven divided by the amount spent for the campaign advertising.
Calculating marketing ROI or ROAS for campaigns that don’t have clicks (e.g. TV, Radio, Print, Digital Display, Digital Video, and many types of Paid Social marketing) requires more advanced marketing measurement solutions. See OptiMine’s guide on selecting the best marketing attribution solution as click and tracking-based attribution does not work for many types of marketing and advertising and doesn’t work if a brand’s conversions come through offline channels.
What is a Good Marketing ROI?
A good Marketing ROI or ROAS is typically a 5:1 ratio, with exceptional ROI being considered at around a 10:1 ratio. Anything below a 2:1 ratio is considered not profitable. That said, these answers depend completely on the objective of the campaign, the product or service margins of the brand, and how well the brand understands the lifetime value of its customers over time.
How Do I Know if My Marketing is Successful?
The answer to how to know if marketing is successful is that it depends on the objective of the marketing and the economics of the brand. If the objective of the brand is to acquire new customers with the campaign, the brand may be willing to invest more, or accept a lower ROAS, to acquire a new customer. For example, if add-on or accessory sales occur after the initial purchase, a brand may be willing to invest more up front in order to make up lost profitability in subsequent purchases with its new customers. Likewise, financial services companies may be willing to spend a lot more upfront to acquire a new customer because they understand the economics of that new customer relationship over time and what to expect in terms of ongoing revenues.
Similar economics come into play based on the brand’s profit margins. For example, a brand with 20% margins will have to achieve a much higher ROI than a brand with 80% margins. These brands would have different acceptable ROI levels and might invest differently as a result.
In all of these examples, it is important for the brand to understand its economics and then set reasonable targets for its marketing and what level of payback is required, and over what period of time. Based on these, the marketing team can then understand whether one marketing investment is successful compared to others.
Why is Marketing ROI Difficult to Measure?
Marketing ROI is difficult to measure because it requires tracking multiple variables that are often difficult to quantify. For example, it can be challenging to determine how much revenue was generated by a particular marketing campaign or how many customers were acquired as a result of the campaign.
Also, many measurement approaches rely on trying to identify which consumer saw a particular advertisement and then seeing if that same consumer made a purchase. This type of measurement, called “marketing attribution”, has become extremely difficult to use because major technology companies such as Apple, Microsoft, Firefox and Google have shut down (or will shut down soon) the ability to track individual consumers across their browsers and devices. Read more about privacy-driven measurement challenges and how to address them.
Also, many marketing channels and conversion points are not very “trackable”. Traditional forms of advertising from TV, radio, print, OOH to digital channels such as video, display and paid social advertising have either no ability to track a consumer or very few “clicks” or other direct engagements with the ad itself. And brands that still capture sales conversions in offline channels such as physical locations, via call centers, through sales agents or by 3rd party partners and channels have a very difficult time connecting ads to consumers converting offline.
What are Common Mistakes in Calculating Marketing ROI?
Common mistakes made in calculating Marketing ROI include:
- Not tracking all relevant expenses and cost of the campaign, including creative, campaign setup time and other related costs
- Not accounting for the impact of external factors such as seasonality, the economy, market or competitive trends
- Assuming that because an ad was shown, that it drove a conversion. For example, if someone searches your brand’s name and then they make a purchase, did the brand search ad drive the sale? Probably not if the customer was looking for your location, hours of operation, or was trying to go to your website because they had already decided they were going to make a purchase
How to Improve Marketing ROI
To improve Marketing ROI, marketers have many “tools in the toolbox” to drive better performance:
- Marketers can focus on improving their targeting and segmentation strategies to deliver campaigns only to the highest priority consumers of their products and services. This eliminates ad waste and can improve performance.
- Marketers can find more efficient channels to reach as many or more potential customers than via less efficient channels. These cost savings can drive up ROI.
- Marketers can invest in better, more engaging content and creative which can increase the odds of a higher ROI.
- Most importantly, marketers can use modern, agile marketing measurement solutions that provide complete cross-channel measurement and provide tools for optimizing their marketing investments. The “not knowing” the real ROI of marketing generally leads to the “not succeeding” of that marketing. Thankfully modern solutions exist to guide marketers to the best decisions across a wide variety of outcomes and KPIs.
Accurately Measure and Optimize Your ROI
OptiMine can help brands accurately measure and optimize ROI across any digital and traditional marketing for any online or offline conversion. This is critically important as this full cross-channel measurement ensures marketers measure the full, complete impacts of their investments. Armed with this intelligence, brands can decide how best to optimize their budgets to drive the highest performance possible, and to run scenario plans to prepare for many future contingencies and opportunities.
In conclusion, Marketing ROI is an essential metric for businesses to determine whether their marketing efforts are profitable or not. While calculating Marketing ROI can be challenging, businesses can improve their ROI by focusing on better measurement.