How is Marketing ROI (Return on Investment) Calculated?
Marketing ROI (Return On Investment) is calculated as the ratio of incremental contribution to sales from a marketing channel divided by the spend in that marketing channel. This is the most common formula used to evaluate the return on investment of media dollars.
Incremental_sales = f(media_spend, raw_sales, other_parameters)
Once incremental sales is calculated for a tactic using one of the above techniques, the ROI for that tactic is calculated using the following formula.
ROI = (incremental_sales) / (media_spend)
ROI = (revenue – media_spend) / (media_spend)
Another commonly used marketing term is ROAS: Return On Ad Spend. The formula for ROAS: (revenue) / (media_spend)
Marketing “Return on Investment” (ROI) is a way of determining the effectiveness of money spent on marketing initiatives. Marketers want to understand the impact a marketing campaign has on company sales, and to do so, they need to define a clear way of measuring that impact. If the dollars invested in a particular marketing campaign are not returning more dollars to the company in sales, that budget is best reallocated elsewhere.
The need to measure ROI reminds us that launching a marketing campaign is only the beginning. Successful marketing involves continually evaluating the performance of each campaign, determining its impact on profits, and using these insights to adjust and develop strategies for the future.
You will notice that Measured’s marketing ROI formula emphasizes the importance of incrementality. In order to accurately calculate marketing ROI, you need to understand which media investments are contributing to business growth and by how much. This means distinguishing between commonly-used metrics like last-touch attribution (e.g. conversions where a prospective customer viewed a certain Facebook ad at some point) versus incremental attribution (e.g. conversions where the Facebook ad actually caused the conversion).
Another way to look at ROI is to view it as a calculation of:
ROI = Revenue – Media Spend / Media Spend
You may have also heard the related marketing term “ROAS,” which stands for “Return on Ad Spend.” The formula for ROAS is:
ROAS = Revenue / Media Spend
Before using any of these formulas, the savvy marketer needs to establish a reliable way of determining which revenue dollars can be attributed to which marketing channels (which is the very problem the Measured platform was built to solve).
What is the best marketing ROI?
The best marketing ROI is, by and large, digital. The four heavy hitters of the digital marketing arena are email marketing, search engine optimization (SEO) content marketing, pay-per-click (PPC) marketing, and social media marketing (SMM).
Email marketing ROI tops the leaderboard due to its chameleon-esque ability to adapt to your desired campaign personalization. With the right software, companies in any industry can automate their cold outreach, product updates, customer education, and more. At a 36:1 ratio, that means a company using email marketing can expect to see $36 in return for every $1 invested – that’s a 3,600% ROI!
SEO Content Marketing ROI is a lower-cost channel that still provides great results and works as a long-term strategy. In addition to creating great content, ensuring content ranks highly for keywords your audience is searching for is paramount. While it can take up to 6 months to get an accurate picture of your content marketing ROI (remember, this is a long-term strategy), a 2,200% ROI is worth the investment.
Pay-Per-Click (PPC) Marketing is similar to SEO marketing in the sense that marketers must choose high value search terms in order for it to be successful. However, unlike SEO marketing, it is not a long-term investment. Once the ad is turned off, the campaign ends. The 2:1 ROI for PPC is based on the conservative assumption that a company will bring in $2 for every $1 spent on PPC. While various platforms can be used for PPC marketing, Google is by and large the most used and they estimate an $8 profit for every $1 spent on Google Search and Ads (8,000% ROI).
Social Media Marketing (SMM) is growing in popularity due to its versatility and diverse range of platforms. Because SMM is a broad term referring to many different channels, it’s difficult to pinpoint a general ROI. While Facebook offers the highest ROI, social media also expands your brand exposure through partnerships like affiliate marketing. Affiliate marketing spend is looking to reach $8 billion in the U.S. this year, so while it may be new to the game it is certainly an option worth exploring.
However, while any marketer would love a single golden standard to tell them if a plan is “working,” the truth is that all marketing tactics are different, and the effectiveness of your marketing strategy will depend on factors like your industry, your goals, and your company needs. For instance, a major brand might intentionally focus on consumer awareness, market share, or even social media engagement, and because of this, they may decide to move ahead with marketing campaigns that yield a negative ROI. Other companies may need to know that each marketing strategy is increasing sales.
Ultimately, ROI largely depends on how each company wants to define the financial impact of marketing performance. Still, marketers need a general benchmark to operate by, so…
What is a good ROI in business?
A good ROI in business will vary depending on your industry, channels, and strategy. The broadest possible rule-of-thumb is that you are looking to make more than a dollar for every dollar you spend. Many marketing analysts suggest that a good marketing ROI should be at least a 5:1 ratio. An exceptional ROI would be a 10:1 ratio, and a poor ROI would be a 2:1 ratio or lower.
Since your target ROI will vary based on the marketing tactic, you can set a baseline by comparing the return on past marketing tactics to your current sales to determine your starting ROI. Having this point of comparison is one of the benefits of continually measuring marketing ROI across each tactic, campaign, and channel.
Marketers should note that it will be trickier to calculate marketing ROI for certain tactics than for others. Content marketing ROI may be difficult to track if the blogs, podcasts, or videos you post do not directly link to the purchase of your product or service. Conversely, email marketing ROI or even affiliate marketing ROI may be easier to track if the email or advertisement on an affiliate’s website links directly to one of your landing pages.
Why is ROI so important in marketing?
Calculating marketing ROI is essential for strategic and successful marketing. First, every marketing team needs to be able to demonstrate that they are putting their budget to effective use. ROI serves as data-driven evidence to your executives that your campaigns are boosting the company’s bottom line.
Secondly, ROI provides marketers with a clear understanding of how to allocate that budget by revealing which campaigns are performing well over time. The same is true on a tactic-level. If you are seeing the highest ROI in digital marketing, you want to drill down further and see which tactic has been most successful. Is it social media? Email marketing? Does it depend on the time of year? Understanding your ROI helps you ensure that your marketing activities are having the intended effect at any given time.
Lastly, knowing your current ROI gives you a measuring stick for future campaigns. As you make adjustments to your marketing strategy, you can continue to measure ROI, see what causes it to increase, and develop a nuanced plan for future growth.
What is the average ROI on digital marketing?
The average ROI in digital marketing can be difficult to measure, since each company must define “success” for their marketing strategy based on their own niche and needs. However, statistics show that many digital marketers will shoot for a 5:1 ratio—or a profit of $5 for every $1 spent.
Once again, the ROI will vary based on the marketing tactic. Email marketing is often cited as the most profitable with companies estimating that the average return is anywhere from 675% to a whopping 4200% (or $42 for every $1 spent). These impressive numbers would encourage most marketers to set a much higher ROI target for their email campaigns! But why would there be such a large difference in these ROI estimates? The measurement process is key here. Companies looking to prove the impact of a certain tactic may fail to introduce nuance into their measurements, perhaps using selective or conglomerated data instead of evaluating the incremental contribution of each tactic, campaign, or channel.
The Measured marketing platform was created to provide marketers with more reliable cross-channel media measurement. Measured’s focus on incrementality enables more accurate ROI calculations and more effective strategies for optimizing your marketing spend. Visit Measured.com to learn more and sign up for a demo.