Nov 15, 2022 5:39:23 PM | ROI What is ROI in marketing?

When it comes to marketing, many people are confused about what the term "return on investment" (or "ROI") means. 

This term refers to the amount of profit or revenue generated from a particular investment relative to its cost. In other words, how much did you get back for every dollar spent?

Unfortunately, only 36% of interviewed B2B marketers stated that they measure content marketing ROI.

The concept of ROI was developed by accountants to measure the efficiency of businesses. It helps them determine whether their investments are paying off.

Marketing is the art of generating leads and sales through advertising. Marketing professionals use ROI to measure the effectiveness of their campaigns. They want to know whether they are spending enough money to generate the desired results.

Additionally, ROI is an important metric for justifying our inbound marketing efforts and impressing the right people.

In this blog post, we'll explain what ROI is and how you can use it to measure the effectiveness of your marketing campaigns.

What is Marketing ROI?

It is the return on investment (ROI) that the marketing industry quantifies to justify how a marketing plan and campaign can bring in business revenues. ROI is an abbreviation of the term Return On Investment. And in this case, it is measuring how much your business is spending on marketing campaigns against how much revenue the campaigns are driving.

The ROI (return on investment) is a measure of how much your marketing campaigns earn for each dollar spent. A "good" ROI varies depending on your marketing strategy, distribution channels, and industry.

It can be difficult to identify an overall marketing ROI benchmark, as every marketing situation is unique. However, a positive ROI is essential for any successful marketing campaign.

When assessing your online advertising strategies such as PPC, where the ROI data is typically tracked automatically, it can be easy to look at your advertising returns in comparison with others who are similar. Platforms like Google Ads also have years of rich data that support their reported 800% ROI benchmark.

It can be difficult to determine whether or not your blog posts, podcasts, or videos are driving purchases, especially when that content is not hosted or linked directly to the landing page. This can be especially challenging if you are also running other marketing tactics, such as content marketing.

It is no secret that measuring ROI has been a challenge for marketers for many years. Content Marketing Institute (CMI) says determining ROI has felt like a puzzle for marketers for decades. While technology has helped to provide some clarity around the success of content marketing efforts, CMI still recommends taking a long-term view of ROI, and taking into account other factors beyond simple measures like clicks or website traffic.

For most businesses, a good way to establish a "good ROI" benchmark for every marketing strategy is to look at returns for similar tactics that you have tried in the past, along with your current sales numbers. This information should help you set ROI benchmarks and goals that are realistic for your business.

Why is ROI important?

You must know your numbers before you launch any new campaigns. They may be rough early on, but having even benchmarks in place will help set goals for measuring the success of the campaign.

Marketing is not just about "getting traffic" anymore. It is a complicated process, involving a myriad of strategies on both digital and traditional platforms.

To make smart decisions on where to invest time and budget, you must understand each strategy's costs. Once you know the costs of your marketing, you will be better equipped to make decisions that generate a stream of income and thus increase the profitability of your company.

It is important to understand the differences between each type:

• Revenue/sales
• Customer Acquisition Cost (CAC)
• Length of the Sales Cycle
• Engagement duration
• Customer lifetime value (CLTV)

For instance, revenues/bookings are measured as net sales or reservations. CPA, on the other hand, is measured in sales or marketing leads.

Regardless of which ROI you decide to track, most are calculated in a similar fashion. Learn more about the importance of ROI.

Using cost ratio to Determine ROI

Alternatively, you could track your marketing ROI by looking at your Cost Per Lead ratio, or your efficiency Percentage.

This formula calculates how much money is generated per marketing dollar spent.

Cost Ratio = Revenue Generated: Marketing Dollars Spent An effective marketing campaign can produce a Cost Ratio of 5:1, meaning $5 is generated for every $1 spent, for a simple 400%.

Marketing ROI. An outstanding campaign might result in a cost ratio of $10 generated per dollar spent (10:1), with a simple marketing ROI of 900%.

 NOTE: Simple ROI = (sales – marketing cost)/marketing cost

Using direct and indirect revenue attribution

Most marketers measure marketing ROI for programs through either direct or indirect revenue attribution.

With direct attribution, all sales revenue is assigned to just a single marketing contact. In the above example, most marketers will attribute the final touch prior to the prospect's purchase.

With indirect attribution, revenue generated by a sale is distributed equally among all touches.

How is Marketing ROI Used by Companies?

At an organizational level, calculating marketing ROI helps drive corporate decisions and optimize marketing efforts.

Justify Marketing Spend

CMOs have consistently listed earmarking resources and budgets to marketing efforts as their number one priority. However, in order to ensure that future campaigns are funded and resources are allocated, it is critical to ensure that ongoing marketing expenditures and budgets are justified at an executive level.

To do this, marketers must accurately quantify the ROI their marketing efforts are providing for the organization.

For example, they need to know whether or not their native ads are driving conversions and ROI, whereas display ads are falling flat.

From there, the budgets can be allocated appropriately.

Distribute Marketing Budgets

Across both online and offline channels, there are an infinite number of possible combinations for the marketing mix. However, every mix of campaign initiatives requires financing.

That is why knowing which online and offline efforts generate the most revenue is essential to distribute your marketing budget appropriately.

Measure Campaign Success and Establish Baselines

A critical component of any successful marketing team is being able to measure campaign performance and set a baseline to use as a reference for future efforts. With this in mind, accurate ROI measurements can help marketers to do both.

By understanding how the effect of each campaign on total revenue growth, marketers can better determine the proper mix of efforts for both offline and online campaigns.

In addition, measuring ROI continuously allows marketers to set a baseline so they can rapidly measure success and adapt efforts to maximize impact.

How to calculate ROI in marketing

Now we have answered the question," What is ROI in Marketing?", you may be wondering how it is calculated.

The simplest way is with this marketing ROI formula:

First, you can shift your ad budget from social media advertising to PPC advertising. This strategy is standard, as most businesses stick to tactics that drive a consistent and impressive return.

Two, you may invest more money in strategies that do not generate better ROI. You may decide to put a larger portion of the budget towards those low-performing strategies, which will help optimize the campaigns and make them better.

The second option usually happens when companies fail to establish realistic advertising spending, setting them up to fail from the start. By tailoring ad spending, you can put in just enough money to produce better results.

Overall, knowing your ROI allows you to gain an in-depth understanding of what is working within your marketing strategy so that you can determine how you can adjust your budget and achieve the best possible ROI.

The simplest way is with this marketing ROI formula:

(Return – Investment)/ Investment

 

While this is a simple formula, it is nearly too simple.

For a lot of marketers, knowing what qualifies as an investment is tricky. Do you consider the salaries of members of your marketing team?

For instance, or just the costs of hiring a freelancer or an agency for marketing work?

Calculate your marketing ROI more effectively by following this marketing ROI formula:

[(Number of leads x Lead to customer rate x Average sale price) – Cost for marketing] / Cost for marketing

This is a lot to digest and wrap your head around! Let’s break down each part of this formula:

Number of Leads: Your number of leads is the number of people who turn into leads. These are the people who had a prior interest in your business.

Lead-to-Customer Rate: Your Lead-to-Customer Rate is the number of people who convert from lead to customer. So, if you had 20 leads (out of a total of 100 leads) who became customers, then your lead-to-customer rate is 20%, or 0.2.

Average Sale Price: Your average selling price is your product's average price. Calculating an average allows you to take into account sales prices and discounts. 

Marketing Cost: Your marketing costs are the total you spend on marketing campaigns. This amount includes factors such as advertising costs, software, and salaries of the people working on your campaign. 

So, say you have 1,000 leads, 50% of whom turn into customers. On average, they spend $200. It costs you $4000 to advertise to those leads. 

So, if we plug that into the formula, it looks like this:

[(1000 x .50 x 200) – 4000] / 4000 [100,000 – 4000] / 4000 96,000 / 4000 24

 Once you have the total, multiply that by 100 to give you the ROI%. In this case, your ROI is 2,400%.

3 Challenges with measuring marketing ROI

When measuring the ROI in marketing, you are going to run into a few difficulties in measuring it accurately. Let's take a look at three of the main challenges that you'll encounter in measuring ROI in marketing. 

1. Multiple touchpoints

One of the greatest challenges in measuring marketing ROI is the presence of multiple touchpoints.

The customer journey is no longer a linear path; each customer's journey is unique. People interact with your company through various channels, making it difficult to determine which marketing efforts led to the conversion.

For instance, a user might discover your brand through a Google search, read a blog post, subscribe to your email list, watch a product video on YouTube, see a targeted social media ad, and finally make a purchase.

It becomes challenging to pinpoint the exact factor that influenced the user to convert along that specific path. While a targeted ad may have been the final touchpoint, it could have been a video that played a significant role in priming their decision.

There is no foolproof method to identify the exact strategies that influenced your audience's conversion. One potential solution to this problem is to focus on attributing the first and last touchpoints. This attribution model assigns "credit" for ROI to the initial and final touchpoints prior to the sale.

Although this is not the only solution, it can help accurately measure your ROI. Additionally, investing in CRM software like HubSpot can effortlessly track these touchpoints, providing you with valuable insights into what drives user conversions.

The best part is that you won't need to spend hours researching as HubSpot automates the process, and our team of experts can assist you in setting up and running smoothly in no time.

2. Measuring at the right time

Another challenge in measuring marketing ROI is determining the appropriate timing for measurement. Not all customers make purchases simultaneously. While you may have an average sales cycle length, individual customers convert at different rates.

Some customers make impulsive purchases and convert quickly, while others take more time to make a decision.

Certain customers may not be ready to buy immediately or may not have an immediate need for your product. They might eventually make a purchase, but by that time, your marketing campaign may have already ended.

Moreover, certain strategies require more time to convert than others. For example, email marketing may necessitate sending multiple emails to generate conversions, whereas PPC ads can drive conversions with a single click.

This variability makes it challenging to accurately attribute conversions to specific campaigns. Therefore, determining the right timing for measuring ROI is crucial.

One solution is to make revenue cycle projections.

By implementing this approach, you anticipate the long-term impact of your marketing strategies. You use historical metrics to make predictions, primarily relying on past performance to project which approaches are likely to result in sales conversions. CRM software can assist in managing the relevant data, aiding in the accuracy of your forecasts.

However, it's important to note that this strategy does not account for marketplace changes or external variables. It is necessary to consider these factors and adapt your analysis accordingly in order to accurately identify the strategies that contributed to conversions.

3. Influence level

Another crucial factor to consider is the varying levels of impact that different campaigns have on your audience.

Not every campaign will resonate equally with your target audience. Some individuals may see your ads without feeling compelled to take any action, while others may be highly motivated to engage with your brand.

When these motivated individuals do take action, it can create data discrepancies, making it more challenging to accurately measure ROI.

One solution is to analyze the impact of each touchpoint.

To address this issue, it is beneficial to work backward and examine every point of contact to understand how they influence customer behavior. This approach proves particularly valuable for companies with longer sales cycles, as it provides a clearer understanding of which steps had the most significant impact on customers.

Using CRM software like HubSpot allows you to track and record each contact point, enabling you to attribute credit to strategies that had the most substantial influence.

However, it's essential to recognize that this strategy runs the risk of overattributing credit to certain strategies. Additionally, it does not account for external variables that can impact how people interact with specific tactics or channels, such as emails and social media.

Best Practices for Measuring Marketing ROI

Measuring return on investment (ROI) in marketing can be challenging, especially when it comes to quantifying the impact of marketing content such as videos and blogs. While traditional PPC and social media ads may provide a more tangible ROI, it's still possible to assess the effectiveness of other marketing efforts.

Here are some best practices to consider:

1. Time: Consider the time it took to produce the marketing content. Keep track of the hours spent by your team or external resources to create the content.

2. Production Costs: Track all expenses related to producing the campaign, including supplies, services, and software used. This will provide a clearer understanding of the total investment required.

3. Promotional Costs: If you allocate a budget for promotional activities, include those costs in your overall measurement. This ensures a comprehensive evaluation of your marketing expenses.

4. Page Analytics: Utilize tracking URLs to assess whether your content is driving traffic to the designated landing page for your product or service. Analyze metrics such as page views, click-through rates, and conversions to gauge the content's effectiveness.

5. Non-Financial Returns: Don't overlook non-financial benefits that your campaign may have generated. Monitor social media engagement, unexpected traffic spikes, or any other indicators of increased brand recognition or audience engagement.

   While these benefits may not directly translate into monetary returns, they contribute to your overall marketing impact.

By implementing these best practices, you can gather valuable data to measure the success and ROI of your marketing efforts, even for content-driven campaigns. Remember to adapt your measurement approach based on the specific goals and objectives of each marketing initiative.

Grow with ROI

Understanding ROI in marketing is crucial for any business looking to maximize its return on investment. By tracking and analyzing the results of your marketing efforts, you can make informed decisions and allocate your resources more effectively.

Remember, a successful marketing campaign is not just about getting more clicks or likes, but about generating tangible results that contribute to the growth and success of your business. So, start measuring your ROI today and watch your business thrive!

For more ways to maximize your paid advertising campaigns, see this step-by-step guide, which offers tips for developing an effective PPC advertising strategy. As you acquire more customers, you may also want to take a look at why ROI is important for your business and how it can help you grow revenue.

If you are looking for a partner to help you grow your return on investment for digital marketing campaigns, we at Fine Media have seasoned inbound marketing experts to help you grow your business ROI, Contact us.