The ultimate metric of business success, Return on Investment (ROI) is a subject that can make both top-level executives and marketing teams wince. While the concept of ROI is fairly simple, calculating it can be daunting in practice. Unless your business model is as simple as a lemonade stand, it’s pretty safe to say that you’ll never hit the nail on the head when it comes to calculating the exact ROI of your marketing efforts — but getting close can be extremely helpful.
The primary benefit of measuring ROI is understanding how successful you are monetarily. On a more granular level, ROI can:
- Guide informed business decisions through understanding which marketing mediums and tactics work best
- Justify market spend by connecting efforts to bottomline results
- Help establish baselines of success for future marketing efforts
The Basic ROI Calculations
In a perfect world, calculating the ROI of your marketing efforts would look like this:
(Sales Growth – Marketing Cost) / Marketing Cost = Marketing ROI
But we all know there are always factors outside of your marketing efforts that impact sales (such as your actual sales team efforts). This means you’ll have to know the sales growth attributed to other factors in order to get your marketing ROI:
(Sales Growth – Non-Marketing Sales Growth – Marketing Cost) / Marketing Cost = Marketing ROI
Once you’ve figured those numbers out (good luck), the next step would be calculating the ROI of your individual marketing channels, and then on the specific campaigns on each channel. This is where things can get tricky.
ROI Means Nothing Without Actionable Insights
The overarching challenge of ROI isn’t the big calculation itself, but is rather forming actionable insights by calculating the ROI of your specific channels, ads, and every aspect of your marketing initiatives. Without knowing what’s working best, deciding where to allocate budget is more of a guessing game. On the contrary, knowing the value of each channel will allow you to project the ROI for future initiatives. Here are a few challenges that many businesses face when getting to channel-specific ROI:
The Sales & Marketing Divide
A common obstacle that businesses face in determining ROI is finding the actual value of their leads. This most often results from a lack of transparency between their marketing and sales teams, in which marketing teams focus on driving leads, pass them to the sales team, and the actual end-value of the leads is never reported back, nor attributed to the channel that they came from. This leads to ambiguity in the value of each channel.
Short Term vs. Long Term Results
Marketing teams often focus on short-term metrics that involve direct actions, such as impressions, engagement, clicks, and immediate conversions because impacts can be shown easily. Campaigns focused on long-term goals like brand awareness and customer relationships can take significant time to take effect and are more difficult to measure, but that doesn’t mean they aren’t a pivotal piece to a holistic marketing strategy. In the same vein, focusing on immediate revenue and not tracking the lifetime value of customers can also hold you back from seeing the true ROI from your individual channels. Many businesses pull back their marketing dollars without realizing the long-term impact of their campaigns.
Fluctuations in Lead Source Value
If you’ve overcome these prior challenges, which means you can measure the revenue attributed to each channel and project the lifetime value of the customers that come through it, you’ll have to repeat the same measurement process whenever you change the tactics (moving billboards, changing Facebook audiences, etc.). When you try a new tactic, the projected ROI will be unknown until it’s measured over time.
Keeping these challenges in mind, the projected and immediate ROI of one specific Facebook campaign could look like this:
Projected ROI = (Revenue + (Customer Count x Avg. Lifetime Customer Value from FB Campaign) – Marketing Cost) / Marketing Cost
Immediate ROI = (Revenue – Marketing Cost) / Marketing Cost
Best Practices for Measuring and Optimizing ROI
Now that we’re through math class, here are some of our best suggestions for businesses who want to track ROI to gain actionable insights while avoiding major headaches.
Plan to Measure Campaign Success
The most critical element in measuring ROI of marketing involves defining your metrics for success and upfront data collection. Using web analytics platforms like Google Analytics can help you visualize which channels are driving traffic, sign ups, and purchases. Utilizing a Customer Relationship Management (CRM) software that can track lead sources and lifetime customer value can help you calculate the value of each lead source. Using surveys that include a “how did you find us?” can help you connect marketing initiatives to bottomline results as well. Whatever initiatives you’re putting money toward, do your best to track their short and long-term impact.
Establish Baselines for Future Campaigns
Once you’ve established a process for tracking results by channel, start using the data you’ve gathered to create baselines for success in future campaigns. Leaning on previous data allows you to make informed decisions about what it will take to achieve a positive ROI in the short and long term on a given channel. For example, if your last Facebook campaign:
- Spent $1,000
- Drove 20 leads ($50 per lead)
- Only 5 leads purchased at an average of $100 each (25% conversion rate)
- But over 6 months those customers spent an average of $600 each
Your immediate ROI would be -50%, but your 6-month ROI would be 300%, barring any additional costs. If you wanted to achieve a 400% 6-month ROI in your next campaign, you’ll have to either (a) create an ad that brings in leads at $37.50, (b) make a change to your selling process to increase your conversion rate, or (c) convince your customers to spend more. Baselines are pivotal in improving your overall marketing ROI and achieving goals.
Don’t Overcomplicate Things
Keep in mind that the degree to which you calculate the ROI of your marketing efforts should only be as granular as your overall marketing strategy. There’s no point in measuring data that your marketing team isn’t equipped to leverage. Our advice – start tracking the overall ROI of each significant channel you can (Billboard, TV, Radio, Print Ads, Organic Search, Google Ads, Social Media), visualize what channels are working best, make adjustments accordingly, and then get more granular with each specific channel, such as which types of ads, placements, and audiences produce greater returns.
Don’t Forget the Big Picture
Getting into the weeds of ROI can cause you to lose track of what’s most important, which is your overall return on investment. When you’re having trouble seeing the bottomline results of your marketing efforts (particularly with brand awareness initiatives), take a step back and check your revenue trend line. If your numbers are going up, there’s a reason, and it’s probably not something in the air — but still be sure to keep seasonal trends and external factors in mind as well.
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