What Is ROI
ROI, or Return on Investment, is a performance measurement used to analyze the effectiveness of an investment made. What is ROI in marketing then? Marketing ROI shows how much revenue is being accumulated in return for your expenses on promotional activities. In other words, it shows you the return on marketing investment.
You can use ROI to evaluate the efficiency of your marketing strategy in general, but also to dive into the results of separate campaigns. Measuring marketing ROI allows you to understand how profitable each of your campaigns are and which marketing channels bring the best results. That’s why any marketing-related action that requires resources can be traced back and evaluated in terms of profitability using the ROI.
And how do you measure ROI? Marketing ROI is calculated by dividing the net profit (or loss) by the total costs spent on marketing. Since ROI is commonly expressed in percentage, the result is multiplied by 100. If your total costs on marketing were $1,000 and your profit was $1,500, the marketing ROI formula would look like this: (1,500-1,000)/1,000 x 100 = 50%
Why Calculate ROI
ROI is one of the most important KPIs (key performance indicators) in the world of marketing, but it isn’t the only one. It’s been quite popular among businesses, however, there are few other useful metrics and measuring tools that, in combination with ROI, can provide a comprehensive overview of marketing performance. We will cover these later in the article and outline the advantages of conducting ROI analysis below.
First, ROI determines the profitability of marketing strategies. Let’s imagine your annual marketing budget is between $10,000 and $15,000. Your marketing strategy is considered healthy when you are generating more than $15,000 in revenue.
Another reason why marketers love using ROI is that this metric allows calculating growth potential. When you see that several of your marketing efforts are bringing positive ROI, you can determine which ones are worth additional investment.
What’s more, regularly measuring marketing ROI can help spot underperforming campaigns in a timely manner and make necessary adjustments. Therefore, ROI enables you to learn from mistakes, which is an essential part of any marketing experimentation. This way, ROI serves marketers as a compass that identifies successes and points out failures equally well.
ROI is a simple yet reliable metric that you can use to test new marketing ideas, improve weak campaigns, and build on those that proved themselves well.
How to Measure Marketing ROI
So how do you measure marketing ROI? Although what you do mainly depends on your marketing objectives, there are a few essential steps that can help measure ROI effectively. We gathered these three key steps below.
In order to boost marketing ROI, you need to clarify what success looks like to your business, meaning, identify your main marketing goals. With well-defined goals, you are more likely to develop a clear plan, follow through, and get results. We recommend using the S.M.A.R.T framework to set goals, which suggests that your goal should be specific, measurable, achievable, relevant, and time-bound. Here is what it implies in practice:
- Specific: Be as concrete as possible when drafting your goals. Setting up a goal “to increase ROI on paid social media advertising by 15%” is much more likely to be achieved than a vague target of “increase ROI”.
- Measurable: What data points can show you that you are on the right path? Select criteria that you can regularly track to interpret the performance of your marketing activities.
- Achievable: Is your goal realistic? Shooting for the stars is a good motto, but it can be demotivating to realize that you are nowhere near your goal as time passes by. Take your current situation including budget constraints into account when outlining your marketing ambitions.
- Relevant: Here, you need to ask yourself whether your current goal is in line with the overall business objective. For instance, when your business needs to establish a presence in a new foreign territory, focusing on increasing brand awareness in your local market is not the best idea.
- Time-bound: When do you expect to gain results? Always plan a deadline for your goal. This will motivate you and your team to accomplish tasks in a timely manner. What’s more, in case you are not seeing results, penciling down the deadline can help re-evaluate and course-correct your strategy on schedule.
Track the Right Metrics
Tracking metrics is crucial to gauge the performance of your marketing campaigns. However, some metrics might be signaling growth, while they are not the most important indicators of results in practice. Ensure that you are not distracted by noise and keep a close look at the metrics that matter.
There is a great variety of useful metrics, and the right ones will depend on your marketing objectives. Here are examples of some of the metrics that are worth considering.
Let’s consider you are running ads on multiple platforms to increase brand awareness. Pay close attention to impressions or reach, CPM (cost per thousand impressions), clicks, and CTR (click-through rate). Your ad might be getting thousands of views, but if no one is clicking on it, chances are something is wrong. Therefore, CTR is a more important metric than the number of impressions.
When your goal is to attract new customers, prioritize leads, LPC (landing page conversion rate), CPL (cost per lead), and CPA (cost per acquisition). These rates vary depending on the niche you are in, so conduct competitor analysis and compare your benchmark with the market’s average. CPA has priority over CPL, which means that your CPL metrics might be higher than planned as long as you are satisfied with the price you pay for acquiring the customer at the end.
Calculate Your Spend
To properly calculate ROI in marketing you need to keep track of your expenses. How much did you spend on each of your marketing campaigns? How much is your overall marketing spend? These are the questions which you need a quick answer on, so ensure that you have this information easily available. Most of the time you can tailor reports from ad platforms before download, so it’s up to you whether you want to check in on your budget allocation on a daily, weekly, or monthly basis.
Beware: your marketing spend is not just the money you allocate to running ad campaigns or other marketing-related activities. To calculate marketing ROI, you need to have a total overview of your expenses, which also includes time that you or your team spends on preparing campaigns, implementing changes, collecting results, etc. If you are using paid tools, whether it is for content creation or for building intel, include these expenses as well.
How to Improve Your ROI
Looking for ways to improve results or even an alternative tactic? There are a few actions you can take to improve your ROI, and we’ve gathered some useful tips for you below.
Do A/B Testing
Test your campaigns using A/B testing, also known as split testing. This method implies that you experiment with new angles by introducing one or two changes in a variable at a time. In A/B testing, “A” refers to the control or original variable, whereas “B” refers to the new version of the testing variable. This approach is widely used by marketers as it allows them to eliminate guesswork and make decisions based on raw data.
Here is how A/B testing can look like when you are running ad campaigns on Facebook. Say you are running multiple ads promoting one product or service. You can determine the winning approach by running multiple ads to the same audience changing only ad copy, title, or visual content (e.g. image, carousel, or video). This is how you discover what works best in your niche. The key here is to test variations one by one.
Don’t Dwell On One Metric
Even though ROI is an invaluable tool to measure marketing ROI, putting too much emphasis on this metric alone can be misleading. A common trap is pausing or even stopping ad campaigns that are not showing positive ROI too early.
First of all, it might take quite a while for the campaign to mature. Finding the right messaging, audience fit, and content takes many trials and errors. Some brands spend months building ads that prove themselves profitable. Suspending the campaign because of its negative ROI in the early stages of iterations can rob you of key learnings about your audience.
Besides, ROI is not the only metric that you can rely on to gain intel about your performance. Consider using additional metrics to build a comprehensive understanding of your marketing strategy. This includes (and is not limited to) the following performance indicators: profit, profit margin, operating expenses, market share, growth rate, customer lifetime value, customer retention, churn rate, and so on.
Try Out Various Channels
You might as well run campaigns for months on LinkedIn in vain only to find out that exactly the same ad brings positive ROI on Facebook. Judging the potency of a campaign based on its performance on one media channel is short-sighted. Consider running marketing campaigns on multiple platforms simultaneously. Allocating more or less the same budget and testing similar ads can tell you where your audience is most likely to respond to your proposition.
Use the capabilities of each channel and experiment with your ad angles. You can advertise one product using multiple content formats depending on the platform you choose to exploit. We, as users ourselves, tend to use multiple channels on a daily basis and it’s no different for your potential customer. Broadening your brand’s area of influence by utilizing multiple channels will increase your chances of success.
Use Automation Tools
As we mentioned earlier, time is just as valuable of a resource as money. Regularly producing marketing content, conducting a proper review, and implementing changes is a labor-intensive process. This is why you can benefit from automating your ongoing processes with tools. Email automation, data scraping, content customization, lead tracking, and audience segmentation are a few tasks you can save time on.
Applying marketing automation tools in your digital marketing strategy takes away the burden of manual and highly repetitive tasks. The right automation tool can enable you and your team to identify your audience and automatically generate necessary actions based on acquired information. A marketing strategy that heavily relies on automation lets you save a great amount of time and resources while contributing to ROI.
Best Software for Tracking ROI
By now, you should understand what needs to be done to increase your marketing ROI. Manually following up on metrics is time-consuming. Why would you when there are so many tools available, including the free ones? We’ve gathered some of them which you can use to keep track of your ROI’s performance.
The most common (and free) ROI tracking software is Google Analytics. All you need to get started is a Gmail account. Set up which type of conversions you want to follow up on Google Analytics. This will allow you to get an overview of which channels and individual ad campaigns contribute to your ROI the most.
Here are a few other free online calculators which you can use to measure and improve your marketing ROI: Social ROI calculator by Hootsuite, ROI calculator by HubSpot, Marketing ROI Calculator by ReportGarden. Have the budget for more advanced tools? Then you might want to try ROI tracking software from BrandMaker, HootSuite Impact, Funnel, and Snowplow Analytics.
How to Track Your Marketing ROI
Knowing how to calculate marketing ROI is not enough. What matters most is being clear on what metrics contribute to your objectives and consistently reviewing results. Keep a flexible approach to interpreting marketing results and be open to using additional metrics that can provide valuable insights into your performance. Combine it with experimentation and meticulous testing, so that your decisions are backed up by real data.