It is no secret that keeping track of your marketing actions is something that you have to do: you need to know the value of your actions in order to be efficient and react quickly. This is when ROI, which is short for Return on Investment, enters the scene: with ROI, you’re able to have a better understanding of how your actions perform, and what changes need to be done.
ROI sounds like something that you want to master but you’re not sure how and where to start? No worries, in this article, we will tell you exactly what ROI is, how to calculate it, and why it is important to calculate it.
ROI measures the value of your investments
In one sentence, ROI means the amount of money that a company receives in return for the investments they make. Therefore, when applied to the investments made for your marketing actions, ROI tells you the profit you get from those actions. In its simplest form, the formula for calculating your ROI looks like this:
If an advertisement campaign has cost $3,000 in total and it has produced $15,000 in additional sales, its ROI would be (15000 − 3000) ÷ 3000 × 100 = 400%.
ROI is an indicator that enables you to determine the value of your short-term campaigns since you can compare your results to the previous numbers. However, you can also assess the efficiency of your marketing actions in the long run: it can help you find the most efficient marketing channels for your organization, for instance.
One important thing is left to say: you need to keep in mind that ROI is not static, so it’s best to calculate it regularly and make changes whenever necessary if you want to use it to its full potential.
What is a good ROI?
The ultimate goal of a company is usually to make profit. Hence, when it comes to marketing, you can aim for a ROI of a 5:1 ratio (that’s approximately 500%). It is a quite high ratio since anything below a ratio of 2:1 would be considered as non-profitable, as you need to cover the cost of production together with the cost of marketing.
Among all the biggest marketing approaches, you can seek a bigger ROI when it comes to email marketing since it’s possible to reach a ROI of 675%, according to Profitworks.
What is included in marketing costs?
When counting the profit margin of marketing actions, the costs usually contain:
- Social media advertising and Google ads
- Trade fairs and events
- Marketing tools, like a newsletter tool and automation tool
- Physical marketing material, like flyers, posters, and pins
- Traditional media, like radio, newspaper, and roadside ads
- Marketing and communications agencies and consultation costs
It is important that you take into account all of your marketing channels when calculating ROI, or you might miss out on meaningful data that could help improve your marketing strategies otherwise.
Analytics as the basis
To properly calculate your marketing ROI, you need a clear picture of the profits and investments of your company. Some tools like Google Analytics help you have an overview of your sales revenue and other goals, that you can then compare to your investments. You can import data from different channels, for example, your billing system, CRM, or online store, to your marketing automation tool to see the bigger picture.
A comprehensive automation tool combines data from different channels and tells you if an unidentified website visitor has finally turned into a buying customer, and where they came from. This means that you can compare your investments and profits of different marketing channels to find the most efficient channels.
Image: You can see your sales revenue straight from Google Analytics.
There are also separate ROI tools on the market that can be integrated with marketing and analytics tools and count your profit margin for you. For example, Funnel calculates your ROI according to your data, also taking different currencies and currency changes into consideration.
Setting key metrics will make it easier to calculate the efficiency of your different marketing channels. Those metrics will differ depending on what you want to achieve with your marketing. For example, the marketing team of a consumer-oriented company will try to increase the number of buying customers, while for a sales-oriented company, the goal of marketing will be to produce valuable leads to the sales team.
In order to determine the right key metrics that will ultimately help you calculate your ROI, you can follow the customer’s journey: the different steps will make it easier for you to choose the metrics that apply to your company, and your marketing strategy. Here are some examples:
- What is the average profit of one lead?
- At what point does a newsletter subscriber or a person who clicks on a LinkedIn ad become a lead that is directed to the sales team?
- How does a potential customer at the very beginning of the buyer's journey become interested enough to subscribe to the newsletter or click on a display ad?
Determining the ROI of your channels from the outset is challenging but necessary. A tip to make it easier: you need to go backwards on the buyer's path and see what percentage has advanced from one stage to the next. These steps will give you a clear picture of how efficiently your investments in, for example, Facebook content marketing are being returned to you.
Limits of ROI
ROI is therefore a tool that will enable you to have a better view of how your marketing actions are performing and to also have more concrete results to show. But just like with other tools, ROI has its limits that you might want to keep in mind.
Indeed, ROI only takes into consideration the financial side of your investment. However, marketing is also about brand awareness and building customer loyalty, for example, and those do not immediately generate profit.
Also, what about the future? ROI, unfortunately, cannot predict if your actions will keep on performing well later, but keeping a close eye on analytics and utilizing different scenario tools can help you find out which channels are most likely to produce the most revenue in the future.
Grow ROI with marketing automation
How to use marketing automation for increasing your ROI? Read our guide on marketing automation and discover seven marketing automation examples to inspire your next campaign!