All businesses need marketing to progress in their work, big and small businesses turn to marketing campaigns to attract customers and increase their work efficiency.
If you are planning to start a marketing campaign, you must analyze all aspects to begin with, you must check whether the cost of the campaign is profitable for the company or does it harm it? Many marketers look at ROI or return on investment to determine its profitability. At the most basic level, ROI compares the amount of money you spend on a project to the amount you earn from it.
Return on investment or ROI is a mathematical formula that investors can use to evaluate their investments and judge how a particular investment is performing compared to other investments. Also, overall ROI for a company is sometimes used as a way to evaluate how well a company is managed.
In the following, we have introduced ROI or return on investment, its improvement methods, advantages and disadvantages, etc. Please stay with us until the end of the content.
Table of Contents
What is ROI in marketing?
Marketing ROI is exactly what it sounds like: a way to measure the return on investment of the amount a company spends on marketing. It’s also abbreviated as MROI or return on marketing investment (ROMI), Avery explains. It can be used to evaluate the effectiveness of a specific marketing program or the company’s overall marketing mix.
How is ROI used?
Knowing the ROI of a given marketing program will help you invest your marketing budget in the future. Because of this, one of the questions you want to ask yourself is, “What was the return on investment of that campaign?”
Here are different ways to prove ROI to help marketers:
In order for the C-suite to allocate resources and budget to your team or campaigns, ongoing expenses must be justified. To do this, marketers calculate the ROI of their marketing efforts.
If you need some extra help, share this stat with your manager: Marketers who calculate their ROI are 1.6x more likely to receive higher budgets for their marketing efforts.
Distribution of marketing budget
You need to know how to distribute the budget appropriately, so it’s useful to understand the revenue from different campaigns and channels.
For example, if your paid social campaigns generate a high volume of qualified gifts, you should probably consider allocating more budget to your paid social program. This does not mean that if a program is not performing well, funds should not be allocated. Different programs have different marketing KPIs and every marketing strategy is different.
Measure the effectiveness of the campaign
Measuring ROI creates a baseline for campaign success that serves as a reference for every future marketing effort and spend. Analyzing your results allows you to measure the success of each campaign so you can adjust your team’s efforts accordingly. You can use these insights to predict the impact of individual activities on revenue growth.
Marketing inherently involves competitor analysis. Whether it’s what content they produce, what channels they have on, or how many customers they have, it’s important to know how they’re doing. When we talk about tracking your competitors’ marketing ROI, we mean their brand performance in the industry.
Calculating marketing ROI
The purpose of calculating ROI is to help connect the dots between all marketing efforts and revenue. There are different ways to calculate ROI, but the basic ROI formula is very simple:
(Sales Growth – Marketing Cost) / Marketing Cost = Marketing ROI
Depending on your industry and customer segments, tracking ROI on certain types of tactics may be easier said than done. Traditional methods such as print media and billboards are usually estimated, compared to email marketing, pay-per-click advertising or other digital marketing methods.
Another common way to display marketing ROI data is as a revenue-to-expenditure ratio, also known as an efficiency ratio, which represents how much an organization spends to earn dollars. Simply put, if marketing spend is $40 and revenue performance is $50, the efficiency ratio is 40/50 or 80%. The goal of every company should be to have this percentage as low as possible.
Calculating customer lifetime value (CLV) is also important, as it provides insight into the company-specific relationship and long-term ROI over the customer’s lifecycle. Here is the formula to follow:
Customer Lifetime Value = (Retention Rate) / (1+ Discount Rate / Retention Rate)
If your industry allows for it, your marketing efforts will ideally translate into customers who will achieve a significant return on your investment. A customer who buys from you once will have a return of X, but if this customer buys 3 more times, he will have a return of 4X.
Remember: it’s always cheaper to keep a customer than to get a new one!
Ways to improve the rate of return on investment
So let’s take a look at how to improve your ROI. Use some of these strategies to increase your ROI, which means more profitability for your company.
Analyze your sales data
Someone should pay attention to the trends and metrics of your company’s sales activities. Before doing this, you need to understand what kind of data you need to track, as well as the tools you need to use to collect it.
This may require the help of an expert. If you’re a small business owner, you may be too close to the situation to see the big picture.
Talk to your sales team
In addition to collecting and analyzing data, talk to your sales team. They are the ones in the trenches and may be able to give your insight you never thought possible. Remember, your sales team is motivated to sell because they have to meet their quota. They want to increase your ROI as much or even more than your company leadership.
Ask your top salespeople to share their strategies. Find out why these special people succeed in finding new prospects and closing sales. Engaged salespeople should seek guidance from sales managers on how to improve their sales pipeline.
Simplifying the sales process
If you’re a small business and don’t have a team of salespeople, analyze your sales process to see what changes might be needed.
For example, whether you are a brick-and-mortar store or an online store, evaluate your checkout process. Are you losing customers due to long queues? Are customers leaving because they are being ignored? Do you want a lot of information from your customers? Is your website difficult to navigate? Is your website slow?
Analyze your online content
Any smart business strategist knows the importance of creating and publishing online content to bring people to your website. It can feel like a waste of time, especially if you don’t get a lot of feedback or shares. Hopefully one thing will happen to your problems, this is how you increase your Google ranking and we all know how important that is.
You’re creating online content for your business website, but you need to learn how to repurpose it to maximize your ROI. For example, you have an idea that you want to share with your customers. You write a long blog post about it, and post it on your website. You include highly valuable internal links.
Learn how to track your progress. See which keywords are getting the most traffic. Analyze which articles are driving the most recent leads. This may require the help of a content expert, but if your Google rankings improve as a result of this expense, it’s a great return on investment.
Limiting the number of contractors and vendors
When you were looking for suppliers when starting your business, you were probably looking for companies that offered the best product at the lowest price. While this business strategy made sense then, does it make sense now?
Attention to your presence in social networks
Is your Google Business page accurate and helpful for customers? Are you present on all social media websites? If so, is there a reason for this?
Do you allow customers to connect with you via social media? If so, how quickly do you respond to that customer?
Finally, how do you respond to online reviews? Do you ignore them and hope they go away, or do you contact unhappy customers to learn how you can improve your product or service?
What is a good ROI?
A good ROI is ultimately subjective and will depend on your needs and goals as a company. Many large and well-known companies strategically choose to pursue marketing campaigns that result in high returns on their negative capital with the goal of dominating consumer awareness and market share. Some marketing campaigns may even have a goal that isn’t even directly monetary, such as increasing engagement on social networks.
The first step in evaluating target ROI is to understand the goals of a specific marketing campaign or tactic; And regardless of what the goal is? Understanding your ROI will keep you on track and ensure that marketing activities are contributing to the project goal as planned.
What are the challenges of ROI?
ROI is calculated using two main metrics: the cost of doing something and the results (typically measured in profit, but for this discussion, let’s use revenue).
The standard answer to “how to calculate ROI” is a formula:
(Attributable sales growth – marketing expense) / Marketing expense = return on investment
There are several challenges to calculating the return on marketing investments in this way.
First, calculating ROI for marketing can be tricky, depending on how you measure impact and costs. Figuring out what portion of sales growth is attributable to a marketing campaign can be difficult. Big companies have complex ROI formulas and algorithms that factor in dozens of different variables.
Second, manually measuring marketing ROI for each marketing campaign takes time and access to company financial resources.
Thirdly, this method requires patience. It can be months before you know if a campaign is profitable.
In short, calculating marketing ROI the “traditional” way isn’t always practical. We need a better way.
So let’s ditch the complicated formulas, attribution models, and algorithms and focus on one simple metric: the marketing revenue-to-spend ratio.
What is the income expense ratio?
The revenue-to-marketing ratio shows how much revenue is generated for each dollar spent on marketing. For example: five dollars in sales for every dollar spent on marketing yields a 5:1 ratio of income to expenses.
Benefits of Return on Investment (ROI)
ROI has the following benefits:
Better measurement of profitability
It relates net income to investments made in a division, which is a better measure of divisional profitability. All department managers know that their performance will be judged on how they use assets to generate profit, which motivates them to use assets optimally. Also, it is ensured that the assets earn returns only if they conform to the organization’s policy.
Therefore, the main focus of ROI is on the required level of investment. For a given business unit at a given time, there is an optimal level of investment in each asset that helps maximize profits. A cost-benefit analysis of this type helps managers to find out the rate of return that can be expected from various investment proposals. This allows them to choose investments that both increase profitability and organizational performance and enable effective use of existing investments.
Achieving goal alignment
ROI ensures goal alignment between different departments and the company. Any increase in segmented ROI improves the overall ROI of the entire organization.
ROI helps in comparison between different business units in terms of profitability and asset utilization. It can be used for inter-company comparisons, provided that the companies whose results are being compared are of similar size and from the same industry. ROI is a good measure because it can be easily compared to the cost of capital to make decisions about investment opportunities.
Performance of the investment sector
ROI is significant in measuring the performance of the investment department, which focuses on maximizing profits and making appropriate decisions regarding the acquisition and disposal of capital assets. The performance of the investment center manager can also be evaluated with a profitable ROI.
Return on investment as an indicator of other performance components
ROI is considered the most important performance measure of an investment unit and includes other performance aspects of a business unit. A better ROI means that an investment center has satisfactory results in other performance areas such as cost management, effective asset utilization, sales price strategy, marketing and advertising strategy, etc.
Compliance with accounting measurements
Return on investment or ROI is based on financial accounting measurements accepted in traditional accounting. No new accounting measurement is required to generate information to calculate ROI. All the numbers needed to calculate ROI are readily available in financial statements prepared in a conventional accounting system. Some adjustments in the existing accounting numbers may be necessary to calculate the ROI, but this does not cause a problem in the calculation of the ROI.
Disadvantages and Limitations of Return on Investment (ROI)
ROI has the following limitations:
- It is difficult to find the optimal definition of profit and investment. Profit has many concepts, including profit before interest and tax, profit after interest and tax, controllable profit, profit after deducting all fixed costs. Likewise, the term investment may have many meanings, including gross book value, net book value, historical cost of assets, and current cost of assets.
- While comparing the amount of return on investment of different companies, it is necessary that companies use similar accounting policies and methods in relation to stock valuation, fixed assets valuation, division of overhead costs, treatment of research and development costs, etc.
- ROI may influence a sector manager to select only investments with high rates of return (ie rates that are in line with or above his target ROI). Other investments that reduce the department’s ROI but could increase the value of the business may be rejected by the department manager. It is possible that another division will invest the available funds in a project that may improve the existing ROI (which may be lower than the ROI of the division that rejected the investment) but will not help the company as a whole.
These types of decisions are not optimal and can distort the overall resource allocation of the firm and can motivate the manager to invest in order to maintain the existing return on investment. A good or satisfactory return is defined as a return on investment in excess of the desired minimum rate of return, which is usually based on the firm’s cost of capital.
Business units with higher ROI and some other ROI units are less influenced by ROI as an investment selection criterion, evaluating ROI inhibits the best segment (with higher ROI) for growth, while the segment with the lowest ROI is motivated. To improve investment in new projects. In this situation, the most profitable units will be disincentivized to invest in a project that does not exceed their current ROI, even though the project will have a good return. This may conflict with the alignment of the purpose and interests of the company as a whole.
- ROI provides a focus on short-term results and profitability. The focus on long-term profitability is ignored. ROI considers current period revenue and cost and ignores costs and investments that increase the long-term profitability of a business unit. Based on ROI, managers tend to avoid new investments and expenses because they are not sure of its return or the return may not be realized for some time.
Managers using ROI may reduce costs related to employee training, productivity improvement, advertising, research and development with the limited goal of improving current ROI. However, these decisions may negatively affect long-term profitability. Therefore, it is recommended for the investment department or business unit to use ROI as only one parameter of the overall evaluation criteria to decide whether to accept/reject a new investment.
5- Investment center managers can influence (manipulate) ROI by changing accounting policies, determining the size of investments or assets, treating some items as income or capital. Sometimes, managers may reduce the investment base by discarding old machines that still have positive returns but less than others. Therefore, the practice of discarding old machines that are still usable may be used by managers to increase their ROI, and a combination of these actions is detrimental to the entire organization.
Examples of ROI calculations
Return on investment is commonly used in marketing to measure the effectiveness of a marketing segment in creating new businesses.
Imagine that your business decides to launch a digital marketing campaign at the same time as launching a new product. You choose Google pay-per-click as your primary marketing channel and commit to a monthly budget of $5,000.
After 3 months of doing this, you check the sales thanks to the PPC campaign and realize that you made $7,000. If your item is priced at $10 with a 50% margin, you’ve made a profit of $5 per sale, or a total profit of $30,000.
To see your return on investment, simply subtract your marketing costs from your profits. In this example, it’s easy.
$15,000 = $15,000 – $30,000
Congratulations, you’ve doubled your investment!
That’s $2 for every $1 spent, or a total return of 100% on capital.
ROI is also used to check how wisely you have invested in stocks.
If you decide to buy 1,000 shares of your stock at $10 each, then sell them a year later at $12, you’ve made $12 for every $10 spent, or $1.20 for every $1. . In this case, your ROI is 20% because you made your initial investment back plus an additional 20%.
You can calculate your return on investment using the following formula:
((net investment return) – (investment cost)) / (investment cost) x 100
So, $12,000 ROI, minus $10,000 investment costs = $2,000.
Then divide this by the investment cost ($10,000) and you get 0.2.
Finally, multiply this by 100 and you get 20% as your overall return on investment.