Your Success ‘Secret Weapon” : Calculating Your Marketing Return on Investment (ROI)
Marketing campaigns are investments. And like any smart investment, they need to be measured, monitored and compared to other investments to ensure you’re spending your money wisely.
Unfortunately, far too many businesses fail to make use of this powerful practice — making it in many ways a “secret weapon.”
Return on investment (ROI) is a measure of the profit earned from each investment. Like the “return” you earn on your portfolio or bank account, it’s calculated as a percentage. In simple terms, the calculation is:
(Return – Investment)
It’s typically expressed as a percentage, so multiple the result by 100.
ROI calculations for marketing campaigns can be complex — you may have many variables on both the profit side and the investment (cost) side. But understanding the formula is essential if you need to produce the best possible results with your marketing investments.
For marketing ROI, the tricky part is determining what constitutes your “return,” and what is your true investment. For example, different marketers might consider the following for return:
- Total revenue generated for a campaign (or gross receipts or turnover, depending on your organization type and location, which is simply the top line sales generated from the campaign)
- Gross profit, or a gross profit estimate, which is revenue minus the cost of goods to produce/deliver a product or service. Many marketers simply use the company’s COG percentage (say 30%) and deduct it from the total revenue
- Net profit, which is gross profit minus expenses.
On the investment side, it’s easy for marketers to input the media costs as the investment. But what other costs should you include? To execute your campaign, you might have:
- Creative costs
- Technology costs (such as email platforms, website coding, etc)
- Printing costs
- Management time
- Cost of sales expense
Basic Marketing ROI Formulas
One basic formula uses the gross profit for units sold in the campaign and the marketing investment for the campaign:
Gross Profit – Marketing Investment
It’s often wise to use the Customer Lifetime Value (CLV) instead of Gross Profit. CLV is a measure of the profit generated by a single customer or set of customers over their lifetime with your company.
Customer Lifetime Value – Marketing Investment
However, some companies deduct other expenses and use a formula like this:
Profit – Marketing Investment – *Overhead Allocation – *Incremental Expenses
*These expenses are typically tracked in “Sales and General Expenses” in overhead, but smart companies deduct them in ROI calculations to provide a closer estimate of the true profit their marketing campaigns are generating for the company.
The components for calculating marketing ROI can be different for each organization, but with solid ROI calculations, you can focus on campaigns that deliver the greatest return. For example, if one campaign generates a 15% ROI and the other 50%, where will you invest your marketing budget next time? And if your entire marketing budget only returns 6% and the stock market returns 12%, your company can earn more profit by investing in the stock market.
Finally, ROI helps you justify marketing investments. In tough times, companies often slash their marketing budgets – a dangerous move since marketing is an investment to produce revenue. By focusing on ROI, you can help your company move away from the idea that marketing is a fluffy expense that can be cut when times get tough.
Before you begin
It’s a good idea to measure ROI on all of your marketing investments – after all, you’re in business to earn a profit. If your sales process is long and complex, you may choose to modify or simplify your ROI calculations, but a simple calculation is more useful than none at all.
Confirm your financial formulas
There are several figures you’ll need for your ROI calculations:
- Cost of goods sold (COGS): The cost to physically produce a product or service.
- Marketing investment: Typically you’d include just the cost of the media, not production costs or time invested by certain employees; however, in certain cases it may be better to include all of those figures.
- Revenue: It can be tricky to tie revenue to a particular campaign, especially when you run a variety of campaigns and have a long sales process. Your finance team may have some suggestions for estimating this figure.
Companies calculate these figures differently, so confirm the formulas your company uses — your finance team or accountant can guide you.
Establish an ROI threshold
Set an ROI goal for your entire budget and individual campaigns; set a floor as well. By doing so, you gain more power over your budget. If you project that a campaign won’t hit the threshold, don’t run it; if you can’t get an ongoing campaign over the threshold, cut it and put your money elsewhere.
Set your marketing budget
When you have an ROI goal and annual revenue/profit goals, you can calculate the amount of money you should spend on marketing – just solve the ROI formula for the “investment” figure. You’ll be more confident that you’re spending the right amount of money to meet your goals.
Calculate ROI on campaigns; track and improve your results
Tracking ROI can get difficult with complex marketing campaigns, but with a commitment and good reporting processes, you can build solid measurements, even if you have to use some estimates in the process.
Use your ROI calculations to continually improve your campaigns; test new ways to raise your ROI and spend your money on the campaigns that produce the greatest return for your company.
Put Your Success ‘Secret Weapon’ to Work!
The more you understand ROI, the more power you have over your investments. Continue to learn, improve your reporting capabilities and use ROI to improve your campaigns and generate more profit for your company.
This content was originally published here.