Today’s businesses spend a lot on marketing – over $2.1 trillion worldwide, according to HBR. But how do we know if all that money is being well-spent? That’s where return on investment (ROI) analysis comes in.
In an ideal world, calculating your marketing ROI should tell you what’s working, what isn’t, and where you should focus your marketing efforts in the future. But that can be easier said than done – according to marketing expert Neil Patel, less than a third of marketing executives feel that they can effectively evaluate the ROI of each channel they use.
In this article, we’ll take a look at how to calculate ROI, what makes marketing ROI (MROI) a little tricky to figure out, and what you can do to improve your results.
How to Measure ROI in Marketing
Put simply, marketing ROI is the measure of the success of your marketing efforts – for instance, how much revenue was generated by a given marketing campaign. Calculating marketing ROI can be as simple as measuring the sales growth of a business or product line, subtracting what you spent on marketing, and then dividing that number by the marketing cost to get a percentage:
(Sales Growth - Marketing Cost) / Marketing Cost = ROI
So far, straightforward. The problem is, of course, that it assumes that 100% of the sales growth can be attributed to marketing. But what if sales picked up because of seasonal fluctuations, market changes, or just plain luck? To get a more accurate number, you might be better off looking at your average sales growth over 12 months, and taking that into account in your calculation:
(Sales Growth - Average Organic Sales Growth - Marketing Cost) / Marketing Cost = ROI
However, while this calculation might be more representative of how effective your overall marketing strategy is, it doesn’t help you make decisions about future marketing campaigns. Typically, “marketing” is used as a blanket term that covers everything from promotion, to content marketing, to direct outreach, to website design. How can you figure out which marketing costs are generating your sales growth, and which ones are a waste of money?
At this point, you’ll need to start building marketing attribution into your calculations. A marketing attribution model is a way of assigning a value to the contribution made by each marketing tactic on the client’s final decision to purchase.
For instance, if a client finds your business by clicking on a PPC ad in Google, then spends time reading your blog, then signs up for a webinar and finally purchases your product, each of those “touchpoints” helped persuade the client to buy.
With a marketing attribution model, you would assign each touchpoint a percentage of “credit” for the final purchase decision. That way, you could calculate the percentage of sales growth, and thus the overall ROI for each touchpoint, and make better decisions about where to increase or maintain spending, and where to make cuts.
Finally, you’ll need to bear in mind that not all marketing campaigns are directly aiming to drive sales. In many cases, your digital marketing campaign may be designed to increase the number of leads or improve lead conversion rates, rather than directly generating new business. HubSpot proposes a more sophisticated version of the standard ROI calculations to help address this:
[((Number of leads x lead-to-customer rate x average sales price) - cost or ad spend) ÷ cost or ad spend] x 100
The Challenges of Marketing ROI
Even with a handy formula and all the relevant data to hand, it can be highly complex to analyze ROI in marketing. Here are just a few of the areas you’ll need to consider if you want to measure your marketing ROI effectively:
1. How much does your marketing campaign really cost?
This seems like an easy question to answer at first – after all, you know what those Facebook ads cost, right? But it’s not all that simple. Should you add in the cost of the hours it took your social media team to design and optimize the ads? How about the cost of the marketing manager who designed your overall social media strategy? Do you want to take into account the opportunity cost too?
2. How long does any given marketing campaign take to “work”?
Some marketing campaigns are easy to measure, especially those using digital channels. If a customer clicks on a PPC ad and then purchases your product, you can say that the ad “worked,” and you’ll see the revenue from the ad immediately – which is one of the reasons why outbound digital marketing is so popular with CFOs and marketing managers alike!
But what about something like content marketing? Many marketers report strong ROI from inbound marketing approaches such as blogs and video content, but building up a robust inbound presence online can take six months or longer. It can also be complex to tie marketing campaigns to purchases if you’re selling big-ticket items, or products like enterprise software that might be tied to annual buying cycles, in which customers may respond to a marketing campaign months after they’ve seen it.
3. What are you going to consider as a “return” on your investment?
Obviously, the answer to this question is that the only real return that should concern you is cold, hard cash! Do your marketing campaigns generate revenue? And to a certain point, this can be a good approach – it’s essential not to let yourself get caught up in vanity metrics and lose sight of what marketing is all about. But it’s worth bearing in mind that some marketing campaigns aim to retain existing customers, not gain new ones – in which case, a metric like customer lifetime value might be more relevant than sales growth.
How to Boost Your Marketing ROI
Of course, once you’re happy with how you measure your marketing ROI, you’ll want to consider how to improve it. While there are few one-size-fits-all solutions to boosting MROI, here are a few tips that should help you get the biggest bang for your marketing buck:
1. Test early, test often
Marketing Land advises “hacking” multiple aspects of each campaign early on. For instance, try A/B testing different versions of your marketing message to see which one performs best, or check which target audience is most responsive to your campaign before you roll it out more widely.
2. Drill down into the details
If you measure traffic as part of your ROI calculation, track your bounce rates, conversion rates, and unique visitors too. That way, you not only know if your website is working or not, you’ll also be able to see exactly why.
3. Experiment with different channels
To get the most out of your marketing campaigns, you need to make sure you’re using the best media to communicate with your clients. A marketing campaign that isn’t working for you on Facebook might not need to be scrapped altogether – it might just perform better on LinkedIn.
4. Keep an eye on your spending
If you’re tracking your costs every step of the way, you’re more likely to spot areas where you’re wasting your money. Reacting quickly to align your resources more closely to your high-performing campaigns will keep your ROI secure.
Would you like to know more about how the team at the Spot On Agency helps our clients get a better return on their marketing investment? Schedule a time to chat with us to discuss how we can help your company.