Reading Time: 4 minutesFor business owners, marketing is one of the most important investments you can make. Your marketing efforts determine the degree of exposure your business receives, the channels through which your business advertises, the audience that sees your product, and much more. Your investment in marketing ultimately determines the profits your business generates from every customer that doesn’t organically find his or her way to your business.
For most businesses, marketing uses a fair chunk of the budget – as it should, since marketing has the potential to make your business more profitable. However, when was the last time you calculated the return on your marketing investment? More importantly, are you aware of how your marketing ROI stacks up?
What Is ROI?
Although marketing ROI calculators are a great resource to help you dive right in and determine profitability, let’s begin with the basics. ROI, or return on investment, is a basic calculation made to determine whether an action you took was profitable for your business. Analysis of how any profit received from an action – also referred to as a gain or return – compares to the money you spent to receive the profit can be useful to determine how effective the action was. ROI in its most basic form is nothing but a ratio of the money gained from the investment relative to the cost of the investment.
When applied to marketing, ROI takes on a bit of a new meaning compared to ROI for standard financial investments. A marketing investment can be anything from the purchase of a new video ad on social media, to a print direct mail campaign, to a pay-per-click Google ad spurred via a consumer search for a keyword. The return is simply any customer purchases that resulted directly from the given investment campaign.
For example, if you purchased a 30-second spot on local TV for $1000 instructing customers to mention the ad for an additional percentage off, you can assume all customer sales that mention the ad resulted directly from the campaign. If your resulting sales total more than your $1000 ad spend, you’ve achieved a positive ROI. If your resulting sales fall short of the $1000 line, your ad cost more to purchase than it returned in profit, leaving you with a negative ROI.
Why Should You Calculate Your Marketing ROI?
Although marketing in its traditional sense can result in many outcomes for your business – views of your business page, for example, or leads generated by online efforts that aren’t exactly quantifiable – the goal of any marketing campaign is ultimately to produce revenue. The only way to determine if your efforts are producing revenue is to analyze the actual cash flow your marketing actions bring in, making those gray areas like views and leads irrelevant (for now). Sticking to cold, hard, cash facts is the only way to determine if a marketing campaign brought profits to your business.
Once you know if an action was profitable, you can begin to make decisions regarding whether it is an action you should continue. Certainly, there is some nuance in this decision-making process, but generally speaking, you’ll be able to compare the financial risk posed by the initial cost with the level of profit generated. Then, you can determine whether you should continue on as-is, increase your efforts in the area, decrease your efforts in the area, or abandon the tactic altogether.
How Do You Calculate Marketing ROI?
Calculating a simple ROI – even simpler than in the TV ad case specified above – is a fairly straightforward calculation. You must first find your company’s sales growth from the time the new marketing campaign took place, subtract the cost of the campaign, and divide by the cost of the campaign. You must multiply the resulting number by 100 to reflect a percentage that is your ROI. For example:
(Sales growth – campaign cost) / campaign cost = ROI (reflected as a percentage)
For the TV campaign above, let’s say your company’s profits grew by $10,000 after the campaign began. With a campaign cost of $1000, the calculation is:
($10,000 – $1,000) / $1,000 = 9
When you multiply by 100 to reach a percent, the return on your investment is 900%.
However, you have no way of knowing how much of that 900% return is directly due to your new TV campaign (unless you can assume, as we did, that most of the TV campaign-related customers mentioned the ad as requested). In this case, it is helpful to calculate the average monthly growth and include only above-average revenue as campaign-generated profits. For this calculation, you’ll need to subtract the average growth first.
(Sales growth – average sales growth – campaign cost) / campaign cost = ROI
Let’s assume an average sales growth of about $4000 spread over the three months of the campaign based on your company’s historical figures.
($10,000 – $4,000 – $1,000) / $1,000 = 500% ROI
As you can see, the ending ROI figure is much more reasonable when you account for the fact that your company is likely already producing growth from sources other than the campaign under study. Even companies experiencing a monthly decline in sales can identify a new campaign as the source of a stoppage or slowing of negative sales growth.
Why Are Marketing ROI Calculators So Valuable?
Simple ROI calculations are just that – simple. They’re simple to calculate, and provide a relatively simple view of the financial health of your marketing strategies. However, more complicated campaigns such as pay-per-click campaigns or B2C SEO efforts that may have a few cost structures or benefit from performing cost analysis per conversion rather than on a monthly basis can result in calculations that are much more complicated.
SEO experts, as well as other marketing gurus, often provide marketing ROI calculators in an effort to help you determine the ins and outs of a specific marketing investment. Such calculators can provide more intensive calculations such as your cost per sale or the sales from leads versus traffic. You simply input your numbers and the calculators do the work for you – you have a valuable breakdown of your figures as well as the ability to tweak your input to determine how slight changes in your budget could impact your ROI.
