There's an old truism that goes like this: "If you can't measure it, then you can't improve it." That's true of most things, and it's certainly true in the world of marketing.
In other words, you need to know how to calculate the ROI of your marketing campaign. With that knowledge in hand, you can set SMART goals for your team — that is, goals that are Specific, Measurable, Achievable, Realistic, and Time-bound. Only in this way can you make significant improvements to both your overall advertising strategy and the tactics you use to implement that strategy.
What is Marketing ROI?
Put simply, marketing ROI is how businesses measure the success or failure of their advertising campaigns. It compares how much a campaign costs in terms of money, time, and resources against the positive impact of that campaign in terms of sales, leads, customer acquisitions, conversion rate, and other values.
How to Calculate Marketing ROI
The textbook definition for calculating marketing ROI is:
((Total revenue earned - marketing cost) / marketing cost) X 100%
For example, if your marketing campaign earned you $500 in sales and cost you a total of $250 to develop and execute, then your total ROI would be ((500 - 250) / 250) X 100% = 100%. That means you doubled your investment!
The formula to calculate total marketing ROI is fairly simple and straightforward. The trick is to aggregate different forms of ROI to determine the right numbers to plug in. This is not without its challenges.
Challenges of Calculating Marketing Campaign ROI
There are several challenges that come up when trying to determine a campaign's overall ROI. These include the following:
An accurate calculation of ROI must remove so-called "organic sales" from the equation. For example, imagine that Company X has consistently experienced sales growth of 5% year over year.
Then, their marketing team launches a new campaign. After the campaign's completion, Company X finds that its sales growth has increased to 7%. Once they subtract the organic growth that they'd normally experience from the ROI formula, they realize that the campaign itself only contributed to a 2% boost in sales.
This scenario highlights the importance of accounting for a company's organic sales before finalizing ROI calculations. The last thing you want to do is attribute all of your success to a particular campaign when, in reality, most of it was due to other factors.
Another challenge that marketers have to deal with is the fact that ROI isn't always expressed in terms of dollars — nor should it be. There is a wide range of marketing metrics that can be used as a touchstone for any given campaign.
For example, how does an increase in brand awareness contribute to marketing ROI? The answer is not immediately obvious. If you narrow your focus to metrics that easily translate into marketing ROI, then the impact of brand awareness on sales will be ignored. Over time, this may lead to a marketing department neglecting brand awareness as a factor in marketing campaigns.
Combining Different Tactics
If you use different tactics as part of your marketing campaign, then you must aggregate their ROI in order to determine the campaign's total ROI. For example, imagine that you decide to use email, social media, and influencer marketing tactics as part of your next initiative. In such a case, you'd have to calculate the individual ROI of all three tactics before arriving at an accurate aggregated figure.
As a simple illustration, if your email tactics yielded an ROI of 5%, your social media 10%, and your influencer marketing 12%, then your average ROI from all three avenues would come out to 9% — in other words, (5 + 10 + 12) / 3.
However, this assumes you invested equally in all three channels. If you invested twice as much into influencer marketing as you invested in social media, then the ROI of influencer marketing counts for more than the ROI of social media. This means your overall ROI will be slightly higher than 9%.
Customer Lifetime Value
When you acquire a new customer, his or her value cannot simply be measured in terms of a sale at the present moment. You want to retain that customer for years to come. If you do, then the customer's value to your company will be much higher than one transaction.
That's where customer lifetime value (CLV) comes into the picture. CLV represents the total amount of money a customer is expected to spend on your business during their lifetime. Think of it as the total net profit of a given customer. This is an important factor to include in your calculations, since the acquisition of a loyal customer may make the actual ROI of a marketing campaign much higher than it seems to be on the surface.
Calculate Your Next Marketing Campaign's ROI
When you address the above challenges effectively, you'll be able to create an estimate of ROI goals for your next campaign. Once the campaign has completed, you will know for sure whether it was a success or failure.
It's not enough to simply be pleased with a positive ROI — you could be leaving a lot of money on the table if you're not setting the right goals or looking at the right metrics. However, with the right methodology, you'll be able to accurately gauge your next campaign's performance.