There’s More to Marketing ROI (Return On Investment) than Meets the Eye
Marketing ROI, the measure of how much you’ve spent on marketing efforts versus the return you’re getting from those efforts, is a pretty important topic for any business. However, there's more to it than meets the eye. In this article we'll discuss what marketing ROI is and why it's so important for your business' success as well as show you some helpful tips for measuring your own company's ROI.
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What is marketing ROI?
First things first, let's be clear that when we talk about marketing ROI we're talking about the financial return from your marketing spend in the current period. What exactly "return on investment" means will be discussed later on in the article. For now, just know that it refers to how much money you're putting into certain time and effort-intensive activities (like advertising) versus how much money you're getting out of those efforts. You could define this as the ratio between "costs to revenue" and "revenue to costs", but for our purposes let's stick with that definition for simplicity. The term "ROI" is used in other contexts, of course, and it's important to be aware of those differences.
For example, if you have a recurring investment that lets you earn a net return of 5% per year and your ROI is 1%, that doesn't mean you should sell the investment. Why? Because your return may be higher than most investments in the current market! Remember that things like annual compounding can really make a difference, even if the absolute number seems small at first glance. In general though, ROI is used to gauge how effective an investment or company is - or how effective a particular activity under consideration for future investments could be.
What are the main types of marketing ROI?
There are many different ways to measure and back up the effectiveness of a particular marketing activity, but there are two main ways that companies look at their marketing efforts:
Cost-Based Marketing ROI: how much money you spent to make the investment - C = C * D * t where C is cost, D is duration, and t is time (12 months for an annual campaign). Revenue-Based Marketing ROI: how much revenue you earned from that investment - R = R / L where R is revenue, L is length of campaign, and t is time. In this case t can be very short, such as days. Revenue - Revenue is the outcome of marketing. It's how much money your customers pay you (and in turn, how much money you pay yourself). Costs - Costs are the amount of money you put towards an investment. They can be both fixed (like rent or staff wages) or variable (like production costs). Profit - Profit is just the difference between costs and revenue.
Understanding the differences between these two types of marketing ROI will help you decide which kind to use:
Cost-Based Marketing ROI makes for a great measuring stick for advertising because it shows how much revenue was generated from a campaign over time. In other words, the more effective your advertising campaign is, the more money you'll make from it. Revenues-Based Marketing ROI can also be used for advertising because it shows how much revenue was earned from a campaign over time. However, unlike for Cost-Based Marketing ROI, Revenue-Based Marketing ROI doesn't consider how much money you spent to make the investment - it just shows how much money was made from it. Unless you're launching a new product or product line , Revenue-Based Marketing ROI isn't about making money. It's about seeing whether your marketing efforts have been effective and finding ways to improve upon them. While it doesn't measure costs, Revenues-Based Marketing ROI does show how much money you spent to make the investment (i.e., C). Thus, Revenues-Based Marketing ROI provides enough information for most businesses so that they can determine if their efforts are being effective in generating revenues.
What should my marketing ROI be?
The only way to know whether your marketing efforts are worth it is to measure them. It's all well and good to say that "if you're spending X, you should get Y", but without a measurable standard of measurement there's no way to tell if your campaigns are actually making you any money whatsoever. Your bank statement, too, might say that your business is making money, but it doesn't tell you how much you're spending to earn it.
It's important to know what kind of ROI your business should expect from its marketing efforts: Cost-Based Marketing ROI should be at least 5% (for many businesses this can be a lot less). Revenue-Based Marketing ROI depends on the product or service you're selling and how much money it makes. For example, if you're selling a product that costs $10 and people pay $20 for it, your revenue should be around twice the cost - $40 total. If the product costs $10 and people pay $30 for it, your revenue will be around 1.5 times the cost - $20 total. How successful your business is depends on the market you're in and what kind of marketing efforts you've done so far. If you're selling a relatively inexpensive item that people are willing to pay a lot for (or sell for a lot), then your marketing ROI should be much higher than if you're selling something that people don't want to pay very much for (e.g., a cup of coffee). You should always strive for the highest ROI you can get - but before you decide exactly what ROI is, keep in mind that different things can affect it. Here are some of the factors that can influence your marketing ROI: number of customers - the more people who buy from you the higher your revenue will be.
- the more people who buy from you the higher your revenue will be. competition - if many companies are advertising on TV, radio or online, then their advertising costs will look similar as well. However, if there's a concentrated effort to advertise in one venue such as Facebook, then its cost per impression (CPI) will look a lot lower than conventional advertising outlets such as newspapers and television ads.
- if many companies are advertising on TV, radio or online, then their advertising costs will look similar as well. However, if there's a concentrated effort to advertise in one venue such as Facebook, then its cost per impression (CPI) will look a lot lower than conventional advertising outlets such as newspapers and television ads. cost of goods sold (COGS) - the more you spend on materials for a product the higher your costs for that product will be. Thus, your chances of earning a profit from that investment go down.
- the more you spend on materials for a product the higher your costs for that product will be. Thus, your chances of earning a profit from that investment go down.
Conclusion
Your marketing ROI measures whether your investment in marketing is having an effect on your business. It can be expressed either as a Cost-Based Marketing ROI or a Revenue-Based Marketing ROI.
Cost-Based Marketing ROI measures how much revenue was generated over time from an investment in advertising. Revenue-Based Marketing ROI measures how much revenue was earned from an investment in advertising.