Return on investment (ROI) is one of the most important metrics for determining the success of your campaigns. By tracking your ROI in your marketing campaigns, you are able to understand the effectiveness of your business’s marketing campaigns; but what is a good ROI for you? A good ROI means that for every dollar you put into marketing, you get more than a dollar back. Prepare to be put under the microscope if your marketing efforts do not convert more than the original dollar spent. To maintain the trust of your peers, you must fully understand your marketing ROI and how everything affects it. Simply spitting out ROI data will not maintain that trust and can make you look unprepared. Fully understanding how each marketing campaign and all of your efforts can affect your ROI is crucial.
To help you fully understand your marketing ROI, we should first discuss how to calculate your ROI, how to measure any success and the specific metrics that should be used.
How To Calculate Marketing ROI
ROI is a measurement that provides the return you gain in relation to the price of the initial investment, in this case, your marketing initiatives.
ROI is calculated with the following formula:
(Gain from Investment – Cost of Investment)
Total Cost of the Investment
ROI is used to understand the profitability of an investment, but it can also be used to measure what a marketer does and what the returns are. Ideally, your gain from the investment is revenue from sales. However, depending on the sales cycle of your product/service it can take weeks, months, or years before you see the return on your investment. All of this needs to be accounted for before looking at the results and making any changes.
The challenge is to pick metrics that are relevant and important to your own business. Typically these metrics are chosen based on your progress towards making the sale or your key performance indicators (KPIs). These metrics drastically change based on your business model. For example, let’s break down the most common ROI metrics for the top 3 main business models: lead generation, content, and eCommerce.
- Website traffic
- Form conversions
- Event attendance
- Lead volume
- Closed sales
- Lead quality
- Lead conversion rate
- Website traffic
- Average session duration
- Average pages per session
- Comments, shares, surveys, completions, etc.
- Email lists, RSS feeds, app downloads, etc.
- Subscription length
- Watch/read duration
- Website traffic
- Newsletter subscribers
- Social media engagement
- Items added to cart
- Ecommerce transaction volume
- Average sales price
- Sales revenue
So what’s a good ROI for marketing across all channels?
To understand what is a good ROI for you and your business, you can use these industry-standard metrics in tandem with your historical data.
Establishing Your Marketing ROI Without A Formula
Before you start breaking down your numbers and busting out the calculator, there are a few steps to consider in order to track and measure more accurately.
1. Establish Clear Goals
It is crucial for marketers to establish clear goals that indicate what factors will make up their marketing objective. This can go back to marketing 101 when we discussed SMART (Specific, Measurable, Attainable, Realistic, Time-Bound) goals. Also, pay attention to which of these objectives can be applied to your ROI calculation down the road. Consider leveraging measurements such as brand awareness, social platforms engagements, and the ratio between MQLs (Marketing-Qualified Leads) and SQLs
2. Establish Your Costs
Establishing marketing costs such as different departments, personnel, agencies, overhead, etc. can help you create your personal formula for your ROI measurement. This is also common and considered best practice in business as you should always keep track of where you allocate your time, resources, and money.
3. Using The Right Measurements
Using the right attribution models and measurement strategies can help you work wonders on your marketing efforts. You will be able to track consumers more accurately across omnichannel landscapes which will lead to a clearer understanding and more accurate results. Tools can help track your marketing and other business efforts can be extremely useful to you and your team and can help free up time tracking and remove the potential of human error.
Using Historical Data To Set Your ROI
Historical data can be a great way to start measuring your success and seeing what is possible. By tracking your leads and ROI metrics over time, you can identify any fluctuations your marketing strategies may have, where improvements can be made, and where you excel and could possibly invest more.
There are times when you may need to pull back your marketing budget (ex. COVID-19) but you still need to remain active and relevant to remain competitive. There are ways you can increase your sales by reducing your budget. This can be done through analyzing your historical data, as you can see what channels are most effective and allocate your budget to those channels. You can then reduce or remove spending on other campaigns for the time being. This way you can ensure you are reaching your audience and performing well, while not overspending your budget.
What is Good Marketing ROI?
As a rule of thumb, the middle of the marketing bell curve is a 5:1 ratio. Exceptional ROI calculates at a 10:1 ratio. Anything below a 2:1 ratio is not considered profitable and the costs to produce and distribute products/services are often breaking even. Although, costs and overhead lower than 50 percent of the sales price can see profits at a lower ratio. This is where every business being different can play a massive factor in calculating your ROI. It is important to consider your unique overhead costs, margins, industry factors, and standards unique to your sector.
Understanding Marketing ROI
No matter what your business model is, there is one major thing to keep in mind when you are obsessing over your ROI. Make sure you keep your ROI relative to your industry and the market demand for your product/service. For example, if you are in a growing market, you should not be aiming for a steadily growing ROI. You should see greater market share captured over and over again as you grow within the market. If you are in an established market and you are seeing a steady growth in ROI, you are on the right track. On the other hand, if you are in a market that is shrinking, buckle up for a rocky ride as there will be others competing over a smaller piece of the pie. These are all important factors in calculating your ROI and what you should be aiming for.