Marketing Return on Investment
What is ROI?
Return on investment measures the cost of an investment compared to the results generated. ROI is the net gain from an investment divided by the cost of the investment. The result is expressed as a percentage or a ratio. In terms of marketing, ROI usually refers to investments made in marketing activities such as campaigns or brand awareness. The return on this investment can be reflected through items such as sales or leads generated.
ROI can be calculated through the following formula: (Net Income/ Cost of Investment)
What is Marketing ROI?
Marketing ROI is related to determining the value of investing in marketing resources such as creative, overhead and media as related to the overall business.
The Benefits of Marketing ROI
Calculating ROI is relatively simple and the formula is a standard across industries. There are no complicated Excel formulas or configurations to take into account.
Even if you are speaking to executives outside of the marketing department, ROI is a metric that will be both understood and cared about. Since this formula is pretty standard, it can help your team justify spend with your leadership team and this formula easily shows the results of your efforts.
The Challenges of Calculating Marketing ROI
Lag in Time
ROI can fail to account for branding related initiatives, which may take a longer time to produce results. While a great tool to have in the toolbox, marketers need to be prepared to find other ways to show their campaigns are delivering value if campaigns are not focused on immediate sales or lead generation efforts.
One Formula, Different Results
Although the formula for ROI is straightforward, several different factors can be considered when calculating the investment. Does your company include internal costs, such as employee salaries and time spent on each project? Or does your company only account for external costs such as media spent and outsourced resources? Getting a clear understanding on which items fit in each bucket can help you and your team set a baseline for future results.
Failing to Account for Organic Growth
There may be a certain amount of sales growth that happens organically (without the influence of marketing). The traditional ROI formula does not take this into account. Below we’ve outlined other formulas your team can use to understand ROI.
Other Formulas for Marketing ROI
As discussed above, ROI may not always be a direct reflection of the campaign goals. Here are some other formulas your team can use to show marketing value:
Using Customer Lifetime Value (LTV) to Calculate ROI
Since acquiring a new customer is more expensive than maintaining and growing an existing one, LTV can be an important metric to track. Below is a formula to understand how your marketing investments are translating into customer lifetime value growth.
(Customer Lifetime Value – Marketing Investment)/ Marketing Investment
Using Gross Profit
Gross profit takes into account the revenue minute the costs accrued when providing a service or creating a product. This can provide a consistent overview of ROI since it subtracts overhead costs in advance.
(Gross Profit – Marketing Investment) /Marketing Investment
Accounting For Organic Growth
Marketers may also not be accounting for organic sales growth when deciding what has influenced the bottom line. Consider the following formula.
(Sales Growth – Average Organic Sales Growth – Marketing Investment) / Marketing Investment
Drive Higher ROI through Personalization
According to our 2019 report, personalization drives positive results for businesses employing these tactics. 79% of retailers reported deriving ROI through their personalization efforts and nearly 75% of marketers, who exceeded revenue expectations, had allocated funds for personalization. Additionally, almost 80% of surveyed firms with a personalization program in place reported growth in revenue, with only 2% indicating loss.