Most people have probably heard of ROI, but not many people really understand what it means, both literally and in relation to their business.
It's a calculation, and it's related to money. That's about as far as the knowledge goes.
But because of its connection to cost and revenue, it's incredibly important for businesses to monitor the ROI of everything they do, especially when it comes to marketing.
What Is ROI in Marketing?
A return on investment (ROI) is the practice of making more profit than you invested in a marketing campaign.
Basically, it's how you measure the impact of your marketing strategies on your revenue growth. It gives you a holistic view of your efforts and the impact it's having on your business, allowing you to justify marketing spend and budget for current and future initiatives.
ROI can be examined on a case-by-case basis for different campaigns or to assess your entire marketing initiative as a whole.
The Marketing ROI Formula You Need to Know
You'll probably be able to find a bunch of different ways to calculate your marketing ROI, but the main formula that marketers use to understand the impact of their campaigns is:
((Revenue - Marketing Cost) / Marketing Cost) x 100 = Marketing ROI
In order to actually calculate this formula, you'll need to know if your campaigns have yielded anything in the first place. Look at these metrics:
- Number of converted leads
- Lead-to-customer rate
- Your average sales price
- Your cost or ad spend
You'll be able to get a holistic view of your marketing ROI this way, but it does come with the assumption that all of your revenue comes directly from your marketing efforts.
If you want a much more specific calculation, separate from organic sales growth, then follow this formula:
((Revenue - Organic Revenue - Marketing Cost) / Marketing Cost) x 100 = Marketing ROI
Marketing ROI Benchmarks
When trying to assess the success of a strategy, you'll want to sit in the middle of the bell curve at a 5:1 ratio. This indicates a strong ROI for most businesses, with a 10:1 ratio being exceptional.
If you're less than a 2:1, your efforts can't be considered profitable, as the cost to produce and deliver your product or services breaks even with or surpasses your return.
Of course, your target ratio is unique to your organization and can vary depending on your industry.
We use ratios as marketing ROI benchmarks because they're easy to apply and understand. Goals can be easily interpreted and set in a way that everyone involved can understand.
This makes determining a campaign's success easy as pie.
How to Apply the ROI Formula to 4 Common Marketing Strategies
You can use the formula for different means depending on the marketing strategies you leverage.
Every campaign will impact your business' revenue differently, especially when you consider how it generates leads and converts customers.
Here are a few examples of how you can apply it:
1. Content Marketing
Specifically, blog writing.
Blogging isn't the most expensive marketing tactic, but it does cost some money and a lot of time. Whether you've hired a freelance writer or have copywriters in-house, you'll need to calculate labor costs, production costs, and promotional costs.
Let's say that a software company has spent $450 paying a copywriter to write three blog posts and $75 to promote them. As a result, the company earned three new customers, each averaging about $1,200.
Their ROI would be calculated as:
(($3,600 - $525) / $525) x 100 = 500% ROI
With a return of 500 percent, the software company can be confident that they're experiencing a comfortable return on their blogging investment. If it has them on track to meet their goals, then they'll likely continue their strategy.
2. Email Marketing
Email is a huge contributor toward marketing efforts, especially if a company has a sizable email list. Using a tracking URL, you can track the success of the ads or CTAs in an email by how much traffic it drives to a website.
As an example, let's pretend there's a local plant nursery that sends out a weekly newsletter via email. A lawn care service pays $100 for an ad that links to their services page.
Via the tracking URL, the plant nursery can see that their newsletter drove 60 visitors to that landing page. Out of that count, 20 signed up for the $50 lawn service.
Their ROI would look like:
(($1,000 - $100) / $100) x 100 = 900% ROI
That's 900 percent, which is an exceptional return for the lawn care service company.
3. PPC Campaigns
Pay-per-click ads charge you for every click the ad gets. These campaigns can lead to losses on ineffective ads, so ROI should always be closely monitored.
To demonstrate the risk, let's look at an online small business selling handmade jewelry. They want to boost awareness of their newest line of necklaces that cost $125 each.
Their PPC campaign cost them $500, and they only sold two necklaces.
Their ROI would be calculated as:
(($250 - $500) / $500) x 100 = -100% ROI
The small business should turn to a different marketing tactic, as they're actually losing money pursuing a PPC campaign.
4. Paid Social Media Marketing
Companies that regularly engage with customers on social media will likely consider investing in promoted social content in order to boost awareness and engagement.
Most social platforms, like Twitter and Facebook, offer opportunities for social promotions through paid media campaigns. The ROI of those campaigns can rely heavily on audience demographics, time limits, and budget.
To demonstrate, let's examine a lifestyle magazine that's hoping to boost their subscriber count. They offer a one-month free trial before a return to the regular price of $10 a month.
They use a Twitter post to advertise the trial, which leads visitors to a landing page with a tacking URL. The post is promoted for five days with a $20 daily budget. They receive 25 signups for the free trial, and 10 become paid subscribers.
Their ROI looks like:
(($100 - $100) / $100) x 100 = 0% ROI
The magazine broke even on their investment. They could try to improve their campaign by adjusting their target audience, their budget, or the platform they promoted on. Or, they could abandon using paid media marketing entirely and pursue a new tactic.
How to Use Marketing ROI
How can marketers use ROI to their advantage? Easy. It's the mirror that reflects all of the strengths and weaknesses in your strategies.
You can hold that mirror at different angles to help you truly identify where your marketing efforts stand. Here's a few different ways you can leverage it:
Compare Yourself to Your Competitors.
You can compare your effectiveness with your competitors' marketing strategies by getting a better idea of your own efficiency via ROI calculations.
You might not have the data necessary to calculate their ROI, but you can compare your tactics with theirs to get a rough idea. How does their website compare to yours? How much engagement do their blog posts earn? What's their social media presence like?
Look into their SEO, email marketing efforts, and content as well. You'll be able to identify where you stand in your market by looking at your own marketing ROI in comparison to their efforts.
Identify Worthwhile Channels.
Once you've calculated the ROI of a campaign, you'll have a pretty good idea of whether it's worth the investment or not. Use this data to help you identify which marketing channels are worth your attention.
Naturally, you'll want to pull leads in any and every way you can, but the more responsible (and efficient) way to go about it is to invest even more time and attention into the channels that you know work.
Spending money without direction is a pretty fast way to kill a business. Leverage what you've learned from your marketing ROI to avoid revenue drains and go for the gold mines.
Optimize Your Strategies.
When calculating the ROI of a strategy, you'll be able to see the numbers involved closely. This may help you identify what's creating a leak in funds and help you optimize your efforts.
For example, you may identify the opportunity to change the ad script in a failing PPC campaign, leading to a complete revival in its effectiveness.
Sometimes, optimizing a strategy can be as simple as including a price in an ad so that only the right audiences interact with it.
Not every tactic that's experiencing a negative ROI is a lost cause. If it's on the cusp of being profitable, look into what measures can be taken to push it into the green zone and start bringing in revenue.
Hold Yourself Accountable.
This is just as important as the others listed above. If you're a decision maker in your marketing department, then that means that you're accountable for your company's marketing spend.
When you see that a campaign isn't working toward your benefit and has a poor return on investment, it's on you to act to change that.
Whether you decide to try and improve a campaign or to abandon it completely, you have to act rather than let a campaign continue to waste money.
Monitor every channel and look for any drops in effectiveness. Bolster campaigns that need just a little TLC and investigate ones that are hemorrhaging funds.
Your marketing ROI can be one of the chief ways you identify how to spend your budget. It's important to understand what influences it and how it impacts your marketing efforts.
Do a deep dive on your marketing strategies and identify which are helping and which are hurting. You'll be surprised by how quickly you can turn things around for your business.