Marketing ROI Formula Explained
Can you fill in X and Y in the statement “my company gets X amount from every Y invested in marketing?”
There’s the marketing ROI formula – no need to read further if you know what to do with it. Conducting Marketing ROI, or ROMI, analysis is easy peasy lemon squeezy if your company uses one online channel but everything past that can be tricky. Marketing ROI is simple to understand but often complex to calculate. This text helps with the first part and I might know a solution that helps with the calculations.
If it is measured, it can be developed
Imagine a chef developing a recipe for a fine dining restaurant: measuring & documenting the used ingredients makes it possible to develop the dish further and scale it as a sellable product. Second setting: a sprinter training for Olympics with a coach using a timer in order to understand her speed in different segments of the performance. The principles of measurement are universal: know your figures, analyze them and you’ll know how to develop. Marketing ROI tells if your marketing is rocking OR rolling.
Let’s say you invest 100€ to the Facebook campaign and you’re able to generate 200€ from it. Then:
Nice, you got 100% ROI from your campaign which means that for every invested 1€ you generated 2€ back. Good figures – this was an average return of investment in Google Ads in 2017 according to HubSpot. Do you know what and how much you get from advertising?
A good marketing ROI returns something on your investment. In other words: from every invested 1 *choose your currency* you should get over 1 back. This indicates profitable marketing operations.
In thriving businesses, marketing functions are thought of as an investment, not as a cost. It can be still overlooked due to challenges in performance measurement. It’s the responsibility of marketing leaders & experts to build marketing to be profitable: it doesn’t matter if you’re deciding the budget or given a budget, are you an in-house marketer or serving a client: you must be able to understand your marketing return on investment. Preferably at least on overall, channel & campaign levels.
Marketing ROI on overall, channel & campaign level
To make this part more reader-friendly, I’ll use an example from online marketing. Because we love the exact data of online operations, don’t we?
Overall marketing return on investment includes all your invested money in all your marketing mediums. So, all your campaign and other actions towards customers, leads and prospects are combined under one “master ROI”.
Channel-specific ROI is calculated from investments and returns gained by a specific channel. Like in example 1: 100€ was invested in Facebook and 200€ was returned. Hence, Channel ROI was 100%.
I’ll demonstrate the campaign level ROI through a simple scenario in this and following part.
As we defined us as nifty online marketers, we’ll concentrate on the chips invested in digital channels.
An opportunity was discovered from our company’s Google Ads data which suggests that search strings ‘robot vacuum cleaner’ & ‘best robot vacuum cleaner’ are leading searches in terms of clicks leading to our site. We investigated this a bit further with Google Trends regarding the relational search volumes of said keywords in the US.
We’ll invest in Facebook, Instagram, Google Ads, and LinkedIn as the main mediums in this case. (And yes partner, we’re in the business of vacuum cleaning machinery in the US for the time being. Could you come up with a name? Write it to the chat if you will – we’ll discuss more). Now it’s time to test our hypothesis of building an omnichannel campaign based on those aforementioned, unused keywords.
Determination of marketing ROI
After all the creative and set-up tasks have been done, the campaign is launched by the marketing team. The allocated investments for each channel are:
The ‘robot vacuum cleaner’ campaign was measured and optimized during its lifetime, data was gathered to a database – the usual routine. The first checkpoint for non-team members was held after 30 days. Thus, the investment to the campaign based on used mediums was
The gross profit means that all the costs are taken away from the figure. These costs can include external marketing material sourcing and such. The allocation of staff salaries is trickier one as they can be included in marketing ROI calculation or in businesses overall costs (let’s not go there in this post). In this particular case, we ordered a marketing campaign materials from an external marketing agency at a cost of 1000 euros. That’s a nice even number. You negotiated a good price champ!
Robot-campaign generated 11 000€ of new sales through digital mediums. Remember: you might need a system that validates and allocates the resource flows to correct channels. Additional note: remember in this example case that we’re selling robot vacuum cleaners. Thus the pricing and sales play a big part in considering the performance valuation of a campaign.
The ROI of our example campaign would be:
or 66,7% or on every invested euro we would get a return of 1,67€. Simple, isn’t it?
Now. Let’s say that the return of 11 000€ came equally from all used channels (2 250€ per channel). What would be the channel ROIs in this case? There’s an ROI-calculator after the post.
DISCLAIMER: all the actions & figures are imaginary. They’re crafted to satisfy the need for a relevant structure for the case example.
Conclusion & the complexity of marketing ROI
We’ve walked you through a very simplified scenario of determining marketing ROI. As we left out the operative process of creating a marketing campaign, you should understand what marketing ROI means & how it’s calculated. This is essential for understanding how your marketing performs.
Combining overall marketing ROI from all of your actions & channels is a complex task. It doesn’t matter though. As Neil Patel, SEO expert, says “The number one mistake you can make when it comes to marketing is not doing it.” As marketing operations are conducted, the next step is to develop it. Could it be time to investigate the solutions which can help you efficiently know your ROI?
Building measurable marketing depends on valid, overall business goals & objectives which makes marketing accountable. If different functions inside a company don’t work towards the same goals, a good marketing ROI is quite hard to achieve. Still, it should be measured – because if it’s measured, it can be developed.
About the author. I’m quite passionate regarding marketing analytics & measurable marketing. In free time I print old Excel report-sheets & PDFs (paper is reutilized from recycle bin) and set them slowly to the fiery pit of my neighbors Weber. With permission of course.
You can connect & contact me on LinkedIn if you enjoyed the text or need sparring in marketing performance measurement & analytics.