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You fund your marketing budget to promote and sell your products or services. Do you remember when Coca-Cola launched its "Share a Coke" campaign? The company placed popular first names on their products and encouraged customers to share them with friends. It was an ideal campaign for boosting social media reach. How did Coca-Cola know whether the campaign worked? The return on investment (ROI) was a key indicator. Would you know how to calculate marketing ROI? Is there more to the calculations than simply taking revenues and subtracting expenses? Your ROI questions -- answered!
Before you can calculate it, you need to know what it is. Return on marketing investment is a financial indicator of a campaign's success or failure. The easiest marketing ROI formula reads like this: Subtract the marketing cost from the revenue generated by the marketing effort. Next, divide the result by the marketing cost. Then multiply it by 100, which leads to the ROI percentage result. Confused?
Here is an example:
Learning how to calculate marketing ROI is surprisingly easy. However, the real challenge comes in when you select the variables. For example, how do you know the campaign revenue directly relates to your marketing effort? Could it not be (in part, at least) the result of excellent blogging, social media presence, and word-of-mouth advertising from happy customers?
Calculating your existing sales trend can help you overcome brand lift due to other causes. If your company's sales increase by 4% from one year to the next, it is considered organic growth. You need to subtract these 4% from the campaign revenue before you subtract the marketing cost.
Merely examining the results of the basic ROI formula does little to factor in CLV, which is the revenue a customer will likely generate during their relationship with your brand. In some cases, this might make a campaign look like a failure. However, remember that CLV may justify higher acquisition costs at the onset.
Can you incorporate CLV with your ROI? Of course! You subtracted marketing cost from campaign revenue in the formula we previously discussed. Now, you subtract marketing cost from the product of CLV x the number of acquired customers. How do you find accurate CLV figures? Easy! Use historical data for initial purchases, repeat purchases, upgrades, replacements, and referrals. Investing in customer relationship management (CRM) software makes it easy to determine CLV that you can then integrate into your ROI calculations.
So far, we have assumed that your marketing campaign has generated revenue. Sometimes, a marketing campaign helps a company reduce its sales losses. If you have an organic revenue loss from one year to the next, slowing this loss after launching your marketing campaign is good news.
Campaign ROI analysis moves from the bare-bones formulas to determine if the expenditures were justified to create your calculated results. The direct sales from the campaign now have to cover the actual campaign costs—factor in expenses for ad design, ad promotion, labor costs, and software expenditures. As you calculate marketing revenue, look for ways that you could have limited campaign expenses.
Here, you measure marketing performance by:
When a large company determines marketing performance, it typically relies on a scorecard. It weighs metrics such as short-term ROI (40%), long-term CLV (40%), and actual brand impact (20%). Scoring the metric is somewhat subjective, but being very conservative in your evaluations is in your best interest. For example, score the short-term ROI anywhere from 0 (the campaign lost money) to 10 (the campaign was more successful than anyone anticipated. Do the same for CLV and brand impact.
After scoring the metrics, calculate the results. Determine the weighted score by multiplying the weight by the score. If your ROI score is eight and the assigned value remains at 40%, the weighted score would be 3.2. Do the same for the other scores. Finally, multiply the weighted scores. Generally, any scores that add up to five or less show a poor marketing performance. Anything at seven or above points to an excellent campaign. The figures in between show that the campaign worked, but there is room for improvement, often requiring a reduction in campaign spending.
To simplify campaign spending success, marketing insiders developed a marketing ROI benchmark of a 5:1 ratio. Calculate the ROI ratio by dividing the campaign revenue by the marketing cost. Mind you, this time you will not get a percentage result. Instead, you get a ratio.
Earlier, we talked about a $50,000 campaign revenue, which we divided by $10,000 in marketing costs. The result is 5. The new formula would now be $50,000 minus $10,000, which is then divided by $10,000. The result is 4. Multiply it by 100, and you arrive at 400%. The result is around the 5:1 ratio, which is a sign of a good investment in marketing. When the ratio drops below 2:1, you are looking at a campaign that is not sustainable due to excessive overhead.
Confused? Let's break it down by ratio.
The calculations continue until the 9:1 ratio yields an 800% ROI. Following a ratio can lead to slanted results. For example, 2:1 seems low; however, if your CLV is significant, it is a good outcome.
Some marketers favor a return on ad spend (ROAS) calculation. What is the ROI vs. ROAS difference? The bare-bones ROI formula (Revenue—Costs, divided by costs, multiplied by 100) includes several metrics in its cost analysis. Examples include the actual ad spend, labor expenses, design costs, etc.
The ROAS formula divides the ad revenue by the ad spend. In this calculator, you do not factor in labor and design costs or ad spend. While it simplifies things, it realistically measures different metrics. ROI measures profit; ROAS measures ad success. ROI presents a percentage result, while ROAS focuses on a ratio or percentage. Insiders recommend relying on ROI to determine overall marketing success and ROAS to gauge ad campaign performance.
ROMI is an ROI calculation that also answers whether marketing expenditures were appropriate for the revenue the campaign created. Here, you subtract marketing cost from incremental marketing revenue, divide the difference by the marketing cost, and then multiply the quotient by 100. Here, the incremental revenue refers to the sales that are above and beyond what you usually see in revenue, which you could then attribute to the marketing campaign. ROMI measures marketing profit, but there are no revenues or expenses.
We are now getting into the weeds of calculating marketing ROI. Why is it useful? If you use CRM, segment customer lists, and track consumer behavior along the sales funnel, attribution modeling ROI is the next logical step. For business owners who give this much thought to their CRM, ignoring attribution modeling is unusual, which is another metric to pinpoint further.
So, what is attribution modeling for ROI? Also known as marketing mix modeling (MMM) ROI, it is a method that gauges the value of a customer interaction against the backdrop of the marketing channel or campaign. You then assign revenue to each channel. Next, you calculate the marketing cost and the channel-specific ROI. For example, your latest marketing campaign took place via paid searches. You spent $8,000 and made $33,333 for this particular marketing channel. Your paid search ROI is 316.6%.
Let's say that you not only focused on paid search but also paid for social media ads. The cost here was $7,000. Continuing with the same attributed revenue, that particular channel has a 376.2% ROI. You can now calculate the overall ROI by combining the two channels' ROI and following the basic calculation. Because we are now getting deep into the nitty-gritty of ROI calculations, it makes sense to use an online marketing ROI calculator that lets you plug values into preset cells. AI is handy here because it lets you create spreadsheets with the formula already preset.
Narrowing down attributions further is possible depending on what you want to achieve. First-click attributions make the most sense for the marketing manager who wants to focus on brand awareness. If you are going to gauge what caused a consumer to make a buying decision, the last-click attribution model makes the most sense. Another option is the time-decay model that measures recent touchpoints instead of first-click metrics. It is a good model to choose if you focus on the most recent customer decision-making points.
There is a good chance that you are already familiar with Google Analytics. Now, you can begin using Google Analytics to measure ROI. It lets you track how your marketing campaigns result in conversions and revenue from your website. You can then compare these figures with your overall marketing expenditures.
Here is what this looks like.
What else can you do to determine your marketing ROI? Conversion value tracking is an excellent way of measuring consumers' actions and assigning them dollar values. When you calculate ROI, you can compare the actual conversion value against the marketing spend. Here, you determine where the high-value conversions occur and then focus your marketing budget accordingly.
You already have the tools needed to track conversion values. Google Analytics, Google Ads, and Facebook Ads are well known for being set up to track conversions such as purchases. If you focus on sales only, the platform tracks revenue. If you also want to factor in leads, let the platform track them using the desired action. You can then assign a dollar value based on the CLV. (An easy-to-remember formula is average customer spending divided by lead conversion rate equals lead value. If customers spend around $1,000 and one out of every 20 interactions results in a lead conversion, the actual lead value is $50.)
For this to work well, you must rely on UTMs for website tracking and attribution models to assign values to the various interactions. To get the complete picture, use the data the platforms offer to determine the total conversion value by source or platform.
Up to now, the ROI calculations we looked at focused on short periods, such as the last marketing campaign, social media push, etc. When you determine your annualized marketing ROI, you can gauge the long-term impact of your marketing spend. We initially discussed Coca-Cola's "Share a Coke" campaign. Its effects continue long after the last name-labeled product left the factory. For example, how do you account for the brand loyalty this campaign generated?
These calculations are valuable if you run several campaigns concurrently or assign different time frames to your marketing campaigns. Annualized marketing ROI lets you see how campaigns stack up in comparison. You will also be able to determine if the budgets you allocate to these campaigns are well spent.
Calculate annualized ROI by adding 1 to the ROI over a set period. Multiply the sum by 12 months and then subtract 1. Finally, multiply the figure by 100. As is the case with all calculation models, there are possible pitfalls. For example, by plugging your figures into the formula, you assume that campaign performance remains static. As you know, this is not always the case.
Where is the starting point for all these calculations? Initially, setting up the platforms and your website to allow for analysis is necessary. This means Google business profile optimization, social media management, and website design to allow for the integration of UTMs.
Because you are busy running your business and making day-to-day decisions, hire experts in small-business website optimization who can get you set up for collecting and calculating ROI data. They will ensure website security, follow Google guidelines, and also ensure accessibility via Americans with Disabilities (ADA) compliance.
Schedule a call today to get started!
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