Calculation examples of measuring marketing ROI.

Measuring Marketing ROI: An Explanation for Beginners

When running a business, everything comes down to your revenue growth. While this is the case for all aspects of your business, it’s especially true for your marketing efforts. After all, businesses spend large sums of money across several aspects of marketing strategy: ad campaigns, customer relationship management (CRM), content marketing, email marketing, social media marketing, the list goes on. But how do you know the money you’re pouring into your marketing budget isn’t going to waste? Measuring your marketing ROI is the answer.

What Is ROI?

In case you’re already lost, ROI stands for “Return on Investment.” Simply put, ROI measures how much money you earn for every dollar you spend. For marketing ROI, only count every dollar spent towards your marketing activities and not other expenses throughout your company. For example, while you would count labor costs for the marketing team working on the campaign, you would not count production costs for the product in your marketing ROI.

Why Measure Marketing ROI?

Return on investment is one of the most important metrics that determines how successful your marketing campaign is for your bottom line. It directly shows how much you earned compared to how much you invested, and in a ratio/decimal/percentage format, so you can easily understand how effective your marketing or ad spend is at producing revenue.

Marketing ROI Calculation

A few different equations can measure marketing ROI. You can record ROI as a ratio (2:1), a decimal (2.0), or a percentage (200%).

(Revenue – Marketing Cost) / Marketing Cost = Return on Investment

This is the most basic marketing ROI formula that you can use. You simply subtract your marketing spend from the revenue earned in a given period of time, then divide that value by the marketing expenses to obtain your ROI value. While this formula is good for getting a quick and easy understanding of if your marketing strategy is working, it is not without flaws. This equation does not account for organic growth or sales growth that came as a result of something other than your marketing campaign.

(Revenue – Organic Sales Growth – Marketing Cost) / Marketing Cost = Return on Investment

This marketing return on investment formula excludes organic sales growth from the overall revenue figure, leaving you with only the revenue that is a direct result of one or more of your marketing tactics. To use this formula, you need to be able to track the sources of your revenue stream to know how much of your sales growth was organic vs. resulting from your marketing investment.

Those formulas work very well for measuring ROI in the short term, which is what marketing teams tend to focus on.

Retention Rate / (1 + Discount Rate / Retention Rate) = Customer Lifetime Value

To get an idea of your long-term return on investment, use a metric called “Customer Lifetime Value” (CLV). CLV calculates how much revenue a business generates from one customer over the course of the consumer-business relationship. This can help as a more long-term measurement of return on investment, as opposed to measuring all customers over one set period of time. Getting an existing customer to return is typically much easier and less costly than getting a new customer to make a first-time purchase, making CLV a valuable measurement to see if you are effectively retaining existing customers. However, similarly to the basic ROI formula, this does not exclude non-marketing-related reasons for gaining sales, making it somewhat less effective for a digital marketing team.

How to Interpret ROI Calculation Results

Now that you understand how to calculate ROI, you need to be able to understand it. Firstly, and obviously, you want to record a positive ROI. On the other hand, a negative ROI indicates that your marketing spend exceeded your revenue and your marketing strategy is ineffective and losing money. If faced with a negative ROI, you need to spend more time looking for the reason that your marketing campaign is ineffective, whether that be a lack of brand awareness, not utilizing the best possible marketing channels, failing to turn leads into conversions, etc. No matter what the issue may be, a negative ROI means that something needs to change in your strategy. Take a long look at all of your key performance indicators (KPIs) to find the root cause of your negative ROI.

Aside from simply being positive or negative, you need more to know if your marketing campaign is effective. It’s not enough to simply have a positive ROI (although it is definitely a good start). As you can expect, a high ROI is a good ROI. A good marketing ROI is at least 5:1, with some of the best marketing teams being able to achieve as high as a 10:1 return. In order to know you are earning enough revenue to continue your marketing efforts, you need to achieve an ROI of at least 2:1.

How Does Your ROI Look?

Now that you know what ROI is, how to calculate it, and how to interpret the results, take a look at your business and figure out your marketing return on investment! Is it what you hoped for? You may be surprised at your results if this is the first time you have looked into return on investment for your marketing department.

If your marketing ROI doesn’t look as good as you had hoped, then have no fear! Lift Marketing is here to help! We are experts in all facets of digital marketing, so if you need help improving your marketing return on investment, we are happy to help! Contact us here so we can get you started.