When you spend money as a business, you need to know what you're getting for your dollar. Otherwise, you can struggle to succeed — throwing money at an unsuccessful endeavor can be costly and unproductive. That's why it's critical to identify metrics you can examine to make sure your money is being spent wisely.
The same is true when it comes to your marketing budget. Determining your marketing return on investment (or ROI) is how you can figure out how successful your marketing strategy is. It's also evidence you can use when meeting with company executives to justify your marketing budget.
Having a positive ROI means that you made more money than you spent on the marketing strategy. Negative ROI means you've lost money on your marketing strategy and you need to reassess your tactics.
Calculating your marketing ROI can often be more complex to calculate than you may think. It's important to establish your benchmarks before you begin the campaign.
What is ROI?
ROI is how much money you make on a project after you factor in how much you've spent. There are two ways to determine your ROI on a given project:
- Your net returns divided by your total investment of money x 100%
- Your investment gain divided by your investment base total x 100%
You can apply this formula to any expenditure for your business. Here's how you use it to calculate the value of what you're spending on marketing.
What is marketing ROI?
Your marketing ROI is how much money you make from your marketing efforts minus the money you spent on them. Your "net return" represents any growth in sales. Your "total investment" is the amount of capital you spent upfront. Not all growth you observe in sales can be credited to marketing. Here's the equation:
Sales Growth — Organic Sales Growth — Marketing Costs = Net Return
How to Calculate Marketing ROI
Marketing ROI can include multiple variables:
- The cost of man-hours employees must use to achieve marketing objectives
- Site traffic
- Conversion rates
- Average value of a first-time sale
- Lifetime value of a customer in one year
You'll also want to know your sales growth, which can be estimated by determining how much your sales numbers would be if you did not invest anything in marketing. That number is your organic sales growth.
Increasing the accuracy of marketing ROI calculations
To get an accurate depiction of your marketing ROI, you'll want all the numbers you input into your calculations to be as accurate as possible. Keep in mind:
- Net returns depreciate over time. Receiving $1,000 this month is more valuable than receiving $1,000 over the course of the next year.
- You'll need to figure out your discount rate, which is how much the value decreases over time.
- Marketing ROI should account for your customer's lifetime value as opposed to their value after the first purchase.
One advantage of using marketing is how it helps increase your brand's awareness over time, which often affects your customers' buying decisions. While not a traditional marketing ROI metric, it can still have an impact. Estimate your brand's value and add it to net returns.