What is ROI in marketing?
| 7 min read
The importance of ROI or Return on Investment is relevant whenever one launches or aspires to launch a new marketing campaign.
ROI helps start-ups and entrepreneurs to evaluate whether the cost of the campaign is beneficial or harmful for the company. It also looks into the profits, benefits, and, consequently, the losses incurred by the campaign.
The simplest definition of ROI would be that it compares the amount of money spent and the amount of total revenue generated by the marketing campaign in question. It is a strategy for tracking your returns from a marketing effort, which is an essential step in managing your business finances.
What is the goal of ROI and how to benchmark?
To put it simply, the aim of ROI is to ensure that you make more than one dollar if one dollar is spent on a particular marketing campaign.
The question of a good ROI, however, is relative and varies based on a lot of external factors like the type of marketing campaign, the distribution channels, the industry you are operating in, and so on. It is not a simple task to decide on one ideal ROI benchmark as all marketing strategies are unique and have their own ROI determining factors.
To give an instance of ROI, it is easier to benchmark when dealing with an online ad strategy like PPC, where ROI data is typically tracked automatically, and you may be able to quickly see how your ad’s return compares to your expenditures. In the case of other platforms like Google Ads, they have years of data to back up their claimed ROI benchmark of 800%.
However, for strategies like content marketing, benchmarking is a complex process since there’s no way you can track exactly how many customers you have gained from it. However, the ROI of content marketing can be tracked somewhat through URLs. And according to Content Marketing Institute, content marketing ROI should be looked at long-term and ideally be calculated as audience growth and engagement.
How to calculate ROI?
All this while, we have only talked about what ROI is and how it is important. Using ROI as a tool to better understand how your business is doing will help you figure out where it may need improvement in order to achieve your goals.
We now explain how to simply calculate ROI for your marketing efforts.
First and foremost, by dividing your investment’s gains by its expenditure, you will get the answer in ratio, and by multiplying it by 100, you will get the percentage. If the resultant percentage is a positive number, then you have earned a profit. Similarly, if the answer is negative, then you have lost money on the campaign.
Here is an example to understand ROI calculation better. Suppose a company decides to opt for a new pay-per-click (PPC) campaign in order to target and pull in customers, then the formula to calculate its ROI might look something like this:
ROI= {(Amount of purchase made by the customers who clicked on the PPC advertisement-total amount spent on the campaign)/ total amount spent on the campaign} X 100
This formula is flexible and can be employed to calculate the ROI for a range of different efforts, starting from marketing to sales.
Although at first glance, this might just seem to be a basic math equation, a lot of other factors also come into play. The hidden costs, time, in fact, even abstract emotional factors like stress and overload among employees should also be considered while calculating ROI.
An example will make understanding the hidden costs easier. Supposedly, you have executed a training session for your employees to learn and upgrade themselves to a new skill that might be necessary for your new marketing strategy, or you have spent a number of months weighing options and deciding which campaign to go with. In such cases, soft factors, like acquiring a new skill or time, will come into the overall calculation of your campaign.
The benefits of calculating marketing ROIs
ROI is employed by marketers in various ways, and it is extremely helpful in deciding on the campaigns that are most profitable for your business. Let us now look at a few benefits that ROI can help you get:
Keep a Check on Marketing Spend
It goes without saying the importance of regulating your business expenditure. The first step towards maintaining a balance between the cost of investment and calculating return is to keep a check on marketing spending from time to time. This is why marketers employ ROI as a tool to complete a lot of tasks at the same time, like allocating resources, budget teams, employees, or campaigns as a whole, and keeping track of the ongoing spending, among others. According to statistics published by HubSpot that entrepreneurs or expert marketers who use ROI from time to time for their campaigns are 12 times more likely to generate improved year-on-year profit. This is why justifying marketing spending through ROI is essential for a successful run of the company.
Assigning Marketing Budgets
You will know about the revenue generated and the areas to work on in case of losses only when you have an idea of how the whole budget is distributed among the various sectors. To generate more profit, you will have to distribute the budget in a judicial manner. For instance, you should consider allocating more budget to your paid social program if your social media campaign is generating many qualified leads. However, this does not necessarily mean that you will cut the budget in any of the sectors which are not yielding a good result or is not up to the mark presently. It is important to keep in mind that different programs have different marketing KPIs, and every marketing strategy is distinct. Therefore, not all marketing strategies will depend on budget. Some might need other resources like time, energy, soft skills of employees, etc.
Evaluate the Potency of your Campaign
In the domain of any project or marketing campaign, a baseline is the starting point to measure and compare its progress against. A baseline permits you to assess and monitor the progress and effectiveness of your project, which is crucial for future reference. An expert market will always keep track of the loopholes in the campaign and analyze the results thoroughly even though it yielded sufficient profit. ROI helps to generate this result and make way for the marketer in charge to look for the areas to work on, keep track of things like the budget if it went astray in a few areas or was spent judiciously, was there a problem with the employees, and so on.
Analyzing Competitors
Another interesting feature that ROI lets you do are to keep track of the success and failures of the competitors’ marketing campaigns. Obviously, this is only possible when their financial data is publicly accessible. If you have the data, it will help you in understanding and studying how they are carrying out their campaigns and reflect it in your own marketing efforts for improvement. There is also a psychological aspect to it. For instance, if you did not have much of a gain in your last marketing campaign, and right then you get to know about the profit brought upon by one of your competitive companies, it works as a stimulus and motivates your team to give their best in the future campaigns.
A few examples of best practices of ROI
An e-commerce company using a promo code through podcasts
In recent years, podcast advertising has become one of the most popular ways of advertising, where an attributed URL will be presented to the host, followed by a call-to-action to visit the website or use a coupon code at checkout. The purpose of both of them is to allow the company to know how many specific leads it is generating, as well as how much revenue the leads generate.
Tracking ROI comprehensively
The opportunity to allocate a specific and calculated budget for each sector in your campaign may not be available all the time. There can be instances where more than one campaign may be running, and then this will become difficult to follow. In such cases, ROI can be employed in a more comprehensive and convenient manner, like in a quarterly, monthly, or annual manner. Even though this might not allocate your budget the way you initially planned, this will at least make sure that it is on the right track.
Start calculating your marketing ROIs
Last but not least, in addition to improving your marketing strategies and campaigns, ROI can provide valuable insight into your digital marketing trends. We hope this article was informative enough to clear some of your doubts, if any, regarding calculating marketing ROIs and how or when they should be employed. Marketing ROIs can help in understanding, improving, and getting to know the ins and outs of all your digital marketing campaigns, resulting in better allocation of budget.