What Is ROI in Marketing?
Marketing ROI Definition
What is ROI (return on investment) in marketing? It is very similar to the ROI of any other investment opportunity, except that it compares sales achieved to the cost of achieving those sales from marketing and advertising activities.
In marketing, the investment portion of the equation could include any or all of the following activities:
- Broadcast advertising
- Magazine or newspaper advertising
- Internet advertising
- Email marketing
- Public relations
- Social media
- Promotions (discounts, special financing, etc.)
- Logos and branding development
- Any other marketing or advertising activity done to produce sales.
Note that some of the items are noted as "advertising." Advertising is typically a function of marketing and is often included in total marketing costs. However, some companies may separate "advertising" from other "marketing" costs to track specific campaigns or efforts.
How to Calculate Marketing ROI
Simple Example: Company spent $5,000 on marketing and advertising for the year. They achieved sales of $10,000.
Calculating marketing ROI is very similar to that of other investment opportunities:
(Sales - Cost of Marketing) ÷ Cost of Marketing = Marketing ROI (Multiply X 100 to get percentage)
In our example...
($10,000 Sales - $5,000 Cost of Marketing) ÷ $5,000 Cost of Marketing = $5,000 ÷ $5,000 = 1.00 or 100%
To check calculation...
Cost of Marketing + (Marketing ROI % X Cost of Marketing) = Sales
For our example...
$5,000 Cost of Marketing + (100% Marketing ROI X $5,000 Cost of Marketing) = $5,000 + $5,000 = $10,000 Sales
In this example, the company doubled their investment!
A Good Read on Measuring Advertising
How a Business Can Have a Great Marketing ROI and Still Lose Money
Doubling any investment sounds really good, right? But that may or may not be a good result for marketing depending on the company's overhead expenses, cost of goods sold (COGS) and desired profit margins. Why?
Say that the simple example company in this article has overhead expenses of $8,000 (which includes the $5,000 for marketing) and COGS of $2,000. Plugging those figures into the formula for calculating profit margin:
$10,000 Sales - $8,000 Overhead - $2,000 COGS = $0 Profit
Ouch! Even though this company can achieve a return that doubles their marketing investment, they are just breaking even.
Marketing ROI cannot be evaluated in isolation of other business expenses and goals. However, knowing what kind of return can be expected from various opportunities can help a business forecast how much money may be needed to generate the level of sales desired, as well as which marketing efforts can achieve desired results.
So what can the example company do to improve their profit situation?
- Reduce overhead expenses.
- Reduce COGS.
- Reevaluate their marketing and advertising choices to select those that may have a lower cost and/or higher marketing ROI.
- A combination of all these efforts.
Marketing ROI Challenges
Next to sales forecasting, one of the most difficult functions for small business owners and marketers is measuring the ROI from marketing. Why?
- Many Factors, Many Methods, Many Results. The marketing ROI calculation can vary, depending on what costs of the sales, advertising and marketing functions are included. Some companies include the cost of sales, i.e. salespersons' commissions, client entertainment, etc. Others may restrict the calculation to include strictly advertising or marketing costs. Still others may wish to only home in on results from specific advertising campaigns.
- Meaningless Metrics. It's tempting to rely on irrelevant metrics—such as number of Likes on Facebook, number of Twitter followers, etc.—since those numbers may be more encouraging and easier to obtain. However, they may have only an indirect or zero impact on the sales process. Click here to learn more about careful selection of metrics to measure.
- Marketing Results are Not Guaranteed. Because of the influence of multiple market and economic factors, simply investing in marketing and advertising is no guarantee that sales will result. As well, what may have worked well last year (or even last month!) may not continue to produce results. This makes measuring marketing ROI a continuous necessity so that adjustments can be made when an activity is no longer producing. .
- Marketing Takes Time. Even more challenging is that marketing and advertising done in one fiscal year may not produce results until the next. So it may be difficult to tie the current year's sales results with the current year's marketing. This can often lead to knee jerk reactions (i.e. pulling ads after a short time) which ultimately hurt sales in the long run.
- Response versus Results. Technically, a response to advertising (i.e. phone inquiry, clickthrough to a website, etc.) is a marketing result. But when measuring marketing ROI, only actual sales results produce the true return on investment. However, both response and results need to be monitored. Knowing how many responses actually convert into sales is a good measure of how effective a business' sales process is. Click here to learn more about PPC (Pay Per Click) ad campaigns and Internet advertising.
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Disclaimer: Any examples used are for illustrative purposes only and do not suggest affiliation or endorsement. The author/publisher has used best efforts in preparation of this article. No representations or warranties for its contents, either expressed or implied, are offered or allowed and all parties disclaim any implied warranties of merchantability or fitness for your particular purpose. The advice, strategies and recommendations presented herein may not be suitable for you, your situation or business. Consult with a professional adviser where and when appropriate. The author/publisher shall not be liable for any loss of profit or any other damages, including but not limited to special, incidental, consequential, or other damages. So by reading and using this information, you accept this risk.
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© 2014 Heidi Thorne