Calculating Marketing ROI

Marketing campaigns are investments. And, like any smart investment, they need to be measured, monitored and compared with other investments to ensure you're spending your money wisely. This article explains how to calculate marketing ROI and improve your marketing campaign results.

How to calculate marketing ROI

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:

(Profit – Investment)
Investment

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 ROI formula is essential if you need to produce the best possible results with your marketing investments.

Find out where to focus your marketing budget

With solid ROI calculations, you can focus on marketing campaigns that deliver the greatest return on investment. For example, if one marketing campaign generates a 15% ROI and the other a 50% ROI, 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.

Improve your marketing campaigns

Calculating marketing ROI helps you improve your ongoing marketing campaigns. When you tweak your offer or launch a campaign to a different list, you can compare ROI and focus on the version that performs best.

Justify your marketing investment

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.

ROI calculation scenarios

It's a good idea to calculate 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 ROI calculation is more useful than none at all.

Confirm your ROI calculation 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 in your ROI calculations.
• Revenue: It can be tricky to tie revenue to a particular marketing 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 a marketing ROI threshold

Set an ROI goal for your entire marketing budget and individual marketing campaigns; set a floor as well. By doing so, you gain more power over your marketing budget. If you project that a marketing campaign won't hit the threshold, don't run it; if you can't get an ongoing marketing 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.

Track your marketing ROI, improve your results

Tracking marketing 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 marketing ROI calculations to continually improve your marketing campaigns; test new ways to raise your marketing ROI, and spend your money on the marketing campaigns that produce the greatest return on investment.

The more you understand marketing ROI, the more power you have over your marketing investments. Continue to learn, improve your reporting capabilities and use your marketing ROI calculations to improve your marketing campaigns and generate more profit for your company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.