The tricky part in determining what constitutes your “return,” and
what your true investment is. For example, different marketers might consider
the following for return:
·
Total revenue generated for a campaign (or gross receipts or turnover,
depending on your organization type and location, which is simply the top line
sales generated from the campaign)
·
Gross profit, or a gross profit estimate, which is revenue minus the cost of
goods to produce/deliver a product or service. Many marketers simply use the
company’s COG percentage (say 30%) and deduct it from the total revenue
·
Net profit, which is gross profit minus expenses
On the investment side, it’s easy for marketers to input the media
costs as the investment. But what other costs should you include? To execute
your campaign, you might have:
·
Creative
costs
·
Printing
costs
·
Technical
costs (such as email platforms, website coding, etc)
·
Management
time
·
Cost
of sales
Marketing
ROI Formulas
One basic formula uses the gross profit for units sold in the
campaign and the marketing investment for the campaign:
Gross
Profit – Marketing Investment
Marketing Investment
Marketing Investment
You can also use the Customer Lifetime Value (CLV) instead of
Gross Profit. CLV is a measure of the profit generated by a single customer or
set of customers over their lifetime with your company.
Customer
Lifetime Value – Marketing Investment
Marketing Investment
Marketing Investment
However, some companies deduct other expenses and use a formula
like this:
Profit
– Marketing Investment – *Overhead Allocation – *Incremental Expenses
Marketing Investment
Marketing Investment
*These expenses are typically tracked in “Sales and General
Expenses” in overhead, but some companies deduct them in ROI calculations to
provide a closer estimate of the true profit their marketing campaigns are
generating for the company.
The components for calculating marketing ROI can be different for
each organization, but with solid ROI calculations, you can focus on campaigns
that deliver the greatest return. For example, if one campaign generates a 15%
ROI and the other 50%, where will you invest your marketing budget next time?
And if your entire marketing budget only returns 6% and the stock market
returns 12%, your company can earn more profit by investing in the stock
market.
Finally, ROI helps you justify marketing investments. In tough
times, companies often slash their marketing budgets – a dangerous move since
marketing is an investment to produce revenue. By focusing on ROI, you can help
your company move away from the idea that marketing is a fluffy expense that
can be cut when times get tough.
Best Case
|
Neutral Case
|
Worst
Case
|
You measure and track the ROI of all of your marketing
investments. Your campaigns deliver the highest possible return and you’re
able to improve them over time.
Your organization understands and agrees with the choices you
make because there’s solid data to support your investments.
|
You calculate ROI on some investments, but because it can get
complex, you don’t attempt to measure it at all times.
You have a general idea of how your investments perform relative
to each other, but you can’t pinpoint the exact return you’re generating. And
in tough times, your budget is cut.
|
You
don’t measure the performance of any of your investments. In fact, marketing
is viewed as a cost, not an investment at all.
Your
company isn’t sure what works and what don’t and it’s a struggle to meet
goals.
|
Marketing ROI Key Concepts &
Steps
Before you begin
It’s a good idea to measure ROI on all of your
marketing investments – after all, you’re in business to earn a profit. If your
sales process is long and complex, you may choose to modify or simplify your
ROI calculations, but a simple calculation is more useful than none at all.
Confirm your financial formulas
There are several figures you’ll need for your ROI
calculations:
·
Cost of goods sold (COGS): The cost to physically produce a product or service.
·
Marketing investment: Typically you’d include just the cost of the media, not
production costs or time invested by certain employees; however, in certain
cases it may be better to include all of those figures.
·
Revenue: It
can be tricky to tie revenue to a particular campaign, especially when you run
a variety of campaigns and have a long sales process. Your finance team may
have some suggestions for estimating this figure.
Companies calculate these figures differently, so confirm the
formulas your company uses — your finance team or accountant can guide you.
Establish an ROI threshold
Set an ROI goal for your entire budget and individual
campaigns; set a floor as well. By doing so, you gain more power over your
budget. If you project that a campaign won’t hit the threshold, don’t run it;
if you can’t get an ongoing campaign over the threshold, cut it and put your
money elsewhere.
Set your marketing budget
When you have an ROI goal and annual revenue/profit goals, you can
calculate the amount of money you should spend on marketing – just solve the
ROI formula for the “investment” figure. You’ll be more confident that you’re
spending the right amount of money to meet your goals.
Calculate ROI on campaigns; track and
improve your results
Tracking ROI can get difficult with complex marketing campaigns,
but with a commitment and good reporting processes, you can build solid
measurements, even if you have to use some estimates in the process.
Use your ROI calculations to continually improve
your campaigns; test new ways to raise your ROI and spend your money on the
campaigns that produce the greatest return for your company.
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