Assume you’re pitching a new marketing campaign to a client. You are very proud of the campaign’s idea and know it would make a difference. Halfway through the presentation, the client inquired, “Will spending this much on marketing benefit our business?”
As a marketer, it’s a constant struggle to demonstrate direct and irrefutable proof of the impact on marketing. When it comes to cutting costs, marketing spending is the first to go. In such cases, the ROI of Marketing explains how to measure marketing success in a straightforward, easy-to-understand manner.
In this article, we’ll go over things like:
- What is the definition of ROI in marketing?
- How to calculate ROI in marketing?
- What is a good marketing ROI?
- Advantages of calculating marketing ROI
- Challenges with measuring marketing ROI
What is ROI in Marketing?
Marketing ROI calculates the profit from your total marketing spend. ROI fundamentally reports on the difference between the cost of your marketing activities and the money generated by those activities.
Companies use ROI to optimize their marketing spend. After all, budgets are limited – every dollar counts and could be spent wisely. ROI validates existing spend and provides strategic insight into which channels to prioritize for future investment.
How to calculate Marketing ROI?
If simply said, ROI is expressed as a percentage or a ratio. To calculate the percentage, subtract the total amount spent on a campaign from the total amount generated, then divide the profit by the total spend.
(Sales Growth – Marketing Cost) / Marketing Cost = ROI
Sounds simple, right? It becomes more complicated when it comes to measuring ROI for B2B campaigns, where the return is difficult to measure or attribute directly. Therefore, always calculate your marketing ROI more effectively by this marketing ROI formula:
[((number of leads x lead-to-customer rate x average sales price) – cost of marketing) ÷ cost or ad spend] x 100.
Sounds confusing? Let us elaborate.
No. of leads here refers to how many people have shown interest in your product/service.
Lead-to-customer rate refers to what percentage of leads are converted to customers. Your lead-to-customer rate would be 20% if 20 out of 100 leads became customers.
Average sales price refers to the average cost of your product. An average can be useful if you occasionally apply discounts or alter pricing in other ways.
Cost of marketing refers to how much money you spend on developing and publicizing the marketing campaign. Costs such as ad spending, hourly wages of people who put time into the project, and costs associated with content creation can all be considered here.
Assume you have spent $500 on your marketing activity with the effect which you gained 100 leads, out of which 40% converted into customers.
On average, your customer spends $100
((100X0.4×100)-500 / 500) = 7
Once you get your total, multiply it by 100 to get the ROI percentage. In this case, your ROI is 700%
What is a good marketing ROI?
Generally, a good marketing ROI is 5:1. In other words, if you’re making $5 for every $1 spent, you’re doing well. An exceptional ROI is 10:1, meaning you earn 10 dollars for every dollar you spend.
If your marketing ROI is less than 2:1, you are probably losing money on your marketing investment. That’s because you’re likely in the red when you factor in the costs of creating and selling the product, you’re marketing.
Advantages of calculating marketing ROI
A proper and ongoing ROI measurement enables your company to reap enormous benefits. Stronger tactics and better budget allocation are key, but other factors should also be emphasized.
1. Helps in the right budget allocation
The ability of your company to acquire insight into where you should be spending your money is one of the most evident advantages. You can consider reallocating dollars to an approach that is doing better if one element of your marketing strategy needs to be fixed or produce the outcomes you want. By this, you can ensure that your spending is optimized and that you aren’t funding ineffective endeavours.
2. More achievable goals
As soon as you start analyzing your ROI, you’ll be able to create achievable goals based on analytics to see where things may be made better. You can start making more extended plans and defining goals for the upcoming year rather than only concentrating on the short term. This enables businesses to strengthen their whole marketing plan and raise brand recognition.
3. Competitor Analysis
Marketing inherently involves analyzing your competitors, whether determining what content they’re producing or what channels they’re on. It is always essential to keep a check on your competitor. When we say track your competitors’ marketing ROI, we mean how their brand is performing in the industry.
Challenges with measuring marketing ROI
So, what’s the problem? Why aren’t we all measuring ROI if we understand the need for it and its benefits? Let’s look at the top three challenges to measuring ROI in marketing.
Knowing when to measure
We must understand when to measure the effectiveness of our activities to gain immediate insight and decide where to invest our marketing time and money next. This is especially true when your marketing action only produces immediate results but requires a consistent approach over time. For example, a television ad campaign can result in immediate success or strengthen our reputation and result in actual results months or even years later.
Multiple touches
An old adage in commercial marketing states that it takes at least seven touches to convert a “cold lead” into a sale. In cultural marketing, we also use various tools and touchpoints to achieve our goals. This makes it challenging to determine what role each tool and touch played in achieving our desired results.
Multiple influencers
A single person rarely decides to purchase. Before deciding, our potential audiences converse, debate, and confer. Each person reacts differently to different aspects of our marketing activity, which adds to the difficulty of determining which action has the most significant impact.
Conclusion
Hopefully, you now understand marketing ROI and how it helps you identify what is effective, where you need to improve, and which strategies you should pursue more aggressively.
Although the ROI calculation can be challenging, it is crucial for marketers. If you don’t, you’ll struggle to justify marketing expenditures and pursue vanity metrics that don’t help your firm grow.
As a marketing consultant, let us help you improve your ROI. To schedule a consultation with us, complete the form below.
