Hi guys, in today's post I will talk to you about an acronym that you have probably heard hundreds of times and that acronym is ROI. ROI stands for Return on Investment and because I am a marketing expert I will talk to you about marketing ROI. More specifically I will talk about three different topics today.
First I will explain to you what marketing ROI is and how you can calculate this for your business. Second I will talk to you about how you can use your marketing ROI calculation to help improve your business. And third I will share with you what is considered a good ROI vs. not so good ROI so that you have some comparison points when you analyze the ROI of your business.
What is Marketing ROI
Ok, so now let's talk about how you can calculate the marketing ROI for your business. So in order to calculate the marketing ROI for your business you need two data points First you need to know the growth in sales for your business over a certain time period, so that can be a month, or six months or a year, or whatever time period that you want to use to calculate the ROI for. And the second data point that you need is the amount of money that you have spent on marketing during that same time period or in other words marketing costs. So the marketing ROI equation is actually quite simple.
Marketing ROI equals to growth in sales minus marketing costs and all that divided by marketing costs. So basically with this equation you can understand how much your sales grew for every one dollar that you spent on marketing. So yeah the equation is quite simple, however it is a little bit tricky to calculate the growth in sales and the true marketing costs for your business so therefore the marketing ROI equation is a little bit tricky I would say.
Another thing that I want to mention about this general marketing ROI equation is that there is many assumptions that go into this equation and therefore this equation is something that you can use to get a general idea of what your marketing ROI is however if you really want to understand the profitability of your different marketing activities you need to actually use a more specific marketing ROI equation which I will share with you in a little bit.
But basically this general marketing ROI equation assumes that all your sales growth is a direct result of your marketing costs. Which is not really always the case, you might have some organic sales growth or you might have sales growth that is coming from your salesforce. There is many different things that influence the growth in sales for every business, it is not only marketing, even though marketing is a really big driver of sales growth of course. So basically that is the general marketing ROI equation and it is really useful to get a general idea of your marketing ROI.
So in addition to this general marketing ROI calculation, you can also do more specific marketing ROI calculations that will help you understand more specifically how different components of your marketing strategy are performing. So for example you can calculate channel specific marketing ROI, so you can calculate marketing ROI for your email marketing channel, for social media, for Google ads and all the other marketing channels that you have for your business.
If you want to calculate email marketing ROI you would need to know how much revenue you have generated from your email marketing activities and how much marketing costs you have had for email during the same time period as the revenue. In general email marketing ROI is really good compared to the other channels.
While social media marketing normally has really low ROI. Part of the reason for this is because it is really easy to track sales that come from email, however it is really hard to track sales that come from social media, nevertheless social media is very necessary, because if you don't have social media presence, you cannot have a successful business nowadays, I don't think. So in addition to channel specific marketing ROI you can also calculate campaign specific marketing ROI. So for example if you do some marketing campaigns, you can calculate how much revenue you are getting from those campaigns, and how much money you have spent on those campaigns, and calculate the ROI for your different marketing campaigns.
When it comes to calculating your marketing ROI there is a couple of challenges that you need to be aware of and those challenges can decrease the accuracy of your marketing ROI calculation. The first challenge is what we call the multiple-touchpoint challenge. So basically in today's digitalized world customers normally have several different touchpoints with your business before they make a purchase. So for example they could go and visit your website, they could sign up for your email, or they could visit your website multiple times and visit your Facebook multiple times, so in general businesses have multiple touchpoints with customers before the customers make a purchase.
And this fact makes it a lot difficult to calculate more specific marketing ROI for different channels or different campaigns it is not always really clear which channel was the most important channel for converting the customer. And another challenge that you need to be aware of when calculating marketing ROI is timing. So a lot of times we will run marketing campaigns and customers will become aware of your brand through those marketing campaigns. However, they might not purchase immediately.
Timing is a little bit tricky when calculating marketing ROI because not all marketing costs actually relate to the same time period as the marketing revenue. So because of those two challenges calculating more specific marketing ROI is challenging.
How to Use marketing ROI
So now let's talk about how marketing ROI is used in business and how marketing experts like to use marketing ROI to make decisions. So the first and very important use for marketing ROI is to understand what is working vs. what is not working. When you calculate more specific marketing ROIs for different campaigns or different channels you can understand which channels and which marketing campaigns are providing better return for the cost that you invest in marketing. So this is very useful when it comes to allocating marketing budgets to different marketing channels or different marketing campaigns. Because in general you want to allocate bigger marketing budgets for channels and campaigns that provide a better ROI.
However, this is not always the case, there is some exceptions, for example social media doesn't normally have good marketing ROI, but still it is a very important channel that provides other benefits to every business. Another thing that marketing ROI is really useful for is to track how your marketing activities and the profitability of your marketing activities is improving over time. Some marketing channels naturally have higher marketing ROI than other channels and in those cases you should track marketing ROI over time and see if it is improving or going down.
Another thing that marketing ROI is very useful for is to justify marketing budgets. So a lot of times, especially in bigger companies, you really need to justify any cost that you ask the management for so for the marketing channels and marketing campaigns that have good marketing ROI that can be used as a reason to get a bigger marketing budget for those campaigns or those channels.
What is a Good Marketing ROI
So in this last section of the article, I will talk to you about what is a good ROI vs. a bad ROI. And the simple answer is, it depends. Really you should not look at marketing ROI as the value of the marketing ROI but you should use it more as a tool to compare different channels and different campaigns. So I think the comparison is more important than the absolute value of the marketing ROI. Because as I said, some channels are naturally going to have a lower marketing ROI than other channels. And some campaigns might have naturally lower ROI because their main objective could be brand awareness not sales.
Having said that, there is one thing that you should be careful about, so if you see a marketing ROI below 1, that is definitely not good, because that means that you are spending more on marketing than the sales growth that you are seeing from that marketing activity than the sales growth that you are seeing from that marketing activity. Your cost is higher than your revenue, and that is really not sustainable so your business cannot survive if your marketing ROI is below one. So when you calculate the marketing ROI for the different channels and the different campaigns you should expect to see, at least, a marketing ROI of one.
And some marketing experts out there say that in general, to have a profitable business, you will need a ratio of five to one between your sales and your marketing costs. This is very subjective and it really will depend on what kind of company you have, whether it is just digital, whether you have a sales force that is also supporting your revenue growth so you should consider all of that when you think about what is a good ROI for your business versus not so good ROI.
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