The ROI Formula in Marketing
“A man who stops advertising to save money is like a man who stops a clock to save time”
Deciding on how much money to spend in a small business or handing a marketing budget to the marketing department of a large corporation are in the end, the same exact thing. Marketing isn’t all about creating art, humor or being creative, it’s about generating revenue for any type of business. You as the business owner or the marketer for the business need to be serious about tying the marketing efforts back to revenue. The marketing spend always depends on the size of the business and the industry, implementing a ratio is the easiest and most efficient way to focus your goal on the ultimate outcome: growing the business.
How to Calculate the ROI of Your Business
The ROI is calculated using two primary metrics
The cost to do something
The outcomes generated as a result
The standard formula:
(Attributable Sales Growth - Marketing Cost) / Marketing Cost = ROI
The revenue to marketing cost ratio represents how much money is generated for every dollar spent in marketing. Marketing spending includes all costs of sales and marketing such as, advertising, marketing materials including your website and social media platforms, branding consultants, and so on. Spending more on marketing does not guarantee more sales, but if done right, it generally has a strong influence.
5:1 Ratio is a Good Marketing ROI
A ratio over 5:1 is considered strong for most businesses, for example, 50 dollars in sales for every 10 dollar spent in marketing. A 10:1 ratio is exceptional, achieving a ratio higher than 10:1 ratios is possible, but it shouldn’t be the focus. The target ratio is largely dependent on your cost structure and will vary depending on the industry.
Also, it is important when calculating the ratio, to include a marketing cost that is an incremental cost incurred to execute a certain campaign. With that said, don’t include the full-time marketing personnel costs since those costs are fixed and aren’t factored into the ratio. Examples to include when calculating the ratio are pay-per-click, display ad clicks, media spend, content production costs, and outside marketing, advertising agency fees, amongst others. The ratio you decide on going with is meant to show you if the campaign passed or failed the test. If the campaign succeeds in giving you the desired ratio or fails you can adjust accordingly to reach your goals.
Understand the Full Return on Investment
Many businesses only focus on getting the first and only transaction from the customer and call it a day without even considering the potential that the customer can have for a lifetime. Lifetime value refers to the value a customer brings a business over their entire life as a customer. So to accurately calculate return on investment, we need to understand the full return. As a marketer you need to see if a customer that generated their first sale is coming back, maybe from other channels, to make an additional purchase(s). If that customer did make an additional purchase and came from that same campaign, that campaign should continue to get credit for the additional sale.
Calculating revenue from your marketing activities isn’t easy and it might not be measured precisely but that doesn’t mean it shouldn't be considered. Be patient since certain tactics like those done on social media, developing content, displaying ads for a targeted audience might take a long time before a purchase is actually made.
As a marketer or business owner, always work on connecting the dots between your marketing efforts and revenue. Today we have incredible analytics tools and software that can provide a better understanding to see from where the customers are coming from and who it is that is making the purchase.