Marketing ROI

You might have heard the term return on investment (ROI) before. Return on investment is often associated with finance and accounting but it is also an important measure in marketing. Large companies invest thousands, if not millions, in marketing plans, strategies, and campaigns. As a result, they want to understand whether all this marketing investment results in returns for the company. At the end of the day, no organization wants to spend on marketing activities that incur losses. To evaluate whether campaigns and strategies are successful, we may use marketing ROI. Read along to find out how marketing ROI metrics help companies with their marketing control process. 

Marketing ROI Marketing ROI

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Table of contents

    Marketing ROI Definition

    You might already be familiar with a marketing process that includes analysis, planning, implementation, and control. The company first analyses its internal and external environment, then plans and implements a strategy. But how to know whether the strategy or campaign was a success? One way to find out is using marketing return on investment (ROI).

    Marketing return on investment (ROI) is a performance evaluation method that measures the net return from an investment.

    Marketing ROI measures how well a company spends its money in terms of marketing. As a result, ROI serves as a performance evaluation metric that assesses the success of a campaign, strategy, or tactic in terms of net return generated. We measure ROI by dividing net returns from the investment by costs.

    Nevertheless, it can often be difficult to measure marketing ROI. Unlike financial or operational investments, it can be challenging to quantify a marketing strategy's outcomes.

    If a company decides to invest in a financial project, it can measure the project's success based on how much additional profit it brought the company. For example, we invested £500,000 in Project A, which yielded a net return of £1.5 million. Here we can tell that the company made an additional £1 million after costs. However, when implementing a marketing campaign, we frequently do not attribute financial value to its results. Instead, we try to build brands, increase engagement, and shape consumer attitudes.

    Marketing ROI Formula

    Although it is not always straightforward to calculate the success of a marketing project, marketers have come up with various tests, metrics, and analytical tools that help us do this. In today's explanation, we will be focusing mainly on marketing ROI. So, let's take a closer look at how we can calculate it.

    The marketing ROI formula is as follows.

    Marketing ROI = Net Return from Marketing InvestmentCost of Marketing Investment

    To calculate marketing ROI, we divide net returns by the cost of the investment.

    An important thing to remember is that ROI is expressed as a percentage.

    The formula above is the standard one for measuring marketing ROI. However, we can always modify the formula to fit what we are trying to measure precisely. For example, if we want to measure ROI in terms of sales, the calculation would work as follows.

    Marketing ROI=Sales - Cost of Marketing InvestmentCost of Marketing Investment

    Similarly, if we wanted to calculate the success of a campaign, we would use the following formula.

    Marketing ROI =Income Generated - Cost of CampaignCost of Campaign

    All in all, marketers can tailor the formula to measure exactly what they are looking for. Let's now take a look at an example of how to calculate it.

    Let's say our company wants to increase brand awareness. As the company's marketing manager, you hire an agency to help you with this project. The agency gives you two options. Project A involves running a tube campaign for two weeks. It would cost you £20,000 in total and is predicted to generate £50,000. Project B involves running an e-mail campaign that would cost you £1,500, expected to create £15,000 in sales. Which project would you choose?

    Project A ROI =50,000 - 20,00020,000=1.5 =150%Project BROI =15,000 - 1,5001,500=9 =900%

    The return on Project B is significantly higher than on Project A. As the marketing manager, you would likely opt for Project B in the short term.

    Importance of ROI in Marketing

    So, why is it critical to assess return on investment in marketing? Firstly, it plays a role in the implementation and control part of the marketing process.

    Marketing control measures and assesses a marketing strategy or campaign's success (or failure).

    This step of the marketing process is crucial as it allows marketers to make corrective changes to a current campaign and attain actionable insights for future strategies and tactics. There are three basic steps of marketing control:

    1. Set marketing goals and objectives (performance standards),

    2. Measure performance and evaluate differences between expected and actual performance,

    3. Take corrective action if required.

    In addition, various types of control define the marketing control process:

    • Financial or expense control - evaluates the financials in terms of the marketing plan and takes corrective action where needed.

    • Operating or planning control - examines whether marketing performance is going according to plan or corrective action is needed.

    • Strategic control - ensures that the company's strategies are in line with the opportunities presented by the market and overall business environment. A marketing audit helps assess strategic control.

    A marketing audit is an overall assessment of the company's marketing activities. The marketing audit determines areas where the firm is thriving and areas where it needs improvement.

    In other words,

    The marketing audit is the comprehensive assessment of all angles of marketing operation in an organization. It means the systematic evaluation of plans, objectives, strategies, activities, organizational structure, and marketing staff." 1

    To sum up, ROI plays a significant role in marketing control. Calculating ROI allows marketers to gain preliminary insight into how a campaign on strategy is performing in terms of investment and return (financial/expense control). It may also provide insight into operational or planning control as it may be used as an indicator of performance. After calculating ROI, marketers can understand whether performance is going to plan or if corrective action must be taken.

    Marketing Implementation

    Regarding marketing strategy implementation, the Strategy Formulation and Implementation Grid shows how marketers can achieve success in their marketing strategies. The matrix is based on two dimensions: formulation and implementation.

    Marketing ROI Benchmarks

    Measuring marketing ROI can be tricky. It's not the actual ROI calculation that is difficult but finding which values to plug into the formula. However, once ROI calculations are done, they can be used in various kinds of tasks - setting specific goals, objectives, and benchmarks. These are critical to business success.

    A straightforward example would be using sales, as sales are easily quantifiable. Let's say that a campaign's goal was to increase sales by 15%. Here we can take the sales value after the completion of the campaign and calculate its return on investment. We can then assess whether the campaign has met its objective and use the overall objective as the benchmark for whether the campaign was successful or not.

    Beyond sales, other standard performance measures include market share, brand awareness, or the number of purchases/revenue. On the other hand, marketers also use more specific, customer-centric measures to evaluate marketing performance, like customer engagement, retention, acquisition, or lifetime value. This may also provide insight into the strength of the company's relationships with customers and indicate which part of the customer purchase journey it might need to improve.

    Additionally, digital metrics have also played a key role in shaping marketing objectives and benchmarks. Measures like site traffic, click-through rate (CTR), conversion rates, search volume, etc., are shaping how we measure the performance and success of online campaigns.

    Look at our Digital Marketing and Marketing Analytics explanations to find out more.

    Overall, there are no specific benchmarks for marketing ROI. While certain industry experts may argue that a 900% return is expected, others might say that a 5:1 ratio is acceptable. As marketing involves a wide range of strategies and campaigns, marketers should calculate a company's ROI benchmarks based on past performance figures and current or future objectives.

    Marketing ROI Examples

    Let's now look at a detailed example of marketing ROI through a short case study.

    Rogers and Sexton (2012) surveyed over 250 corporate marketing decision-makers (director level and above) to find out more about the importance and use of marketing ROI. The study outlines the complications marketers face when using marketing ROI, as the researchers found that most managers have varying understandings of marketing ROI.

    When asked to define marketing ROI, 37% of the respondents did not mention financial effects and 82% did not mention that ROI consists of both financial return and spending. 31% think that just measuring the audience you reach is "marketing ROI." Even when prompted, 19% do not think that "measuring the financial impact of our marketing" is marketing ROI."

    (Rogers and Sexton, 2012, p.11)

    The researchers also found that many managers use traditional measures like brand awareness to make universal marketing decisions.2 The study concluded with a list of managerial recommendations and implications regarding marketing ROI and processes managers should follow to measure performance. The process is as follows:

    1. Set objectives and define KPIs,

    2. Develop appropriate metrics to ensure performance correlates with goals,

    3. Collect relevant data,

    4. Ensure that the entire organization is familiar with marketing objectives,

    5. Evaluate results and reward successful employees.2

    Marketing ROI - Key takeaways

    • Marketing return on investment (ROI) is a performance evaluation method that measures the net return from an investment.
    • We use the following formula to calculate marketing ROI: Marketing ROI = Net Return from Marketing InvestmentCost of Marketing Investment
    • Marketing control measures and assesses a marketing strategy or campaign's success (or failure).
    • Marketing ROI makes up part of marketing control.
    • The three types of marketing control are operating, financial, and strategy.
    • Marketers should calculate a company's ROI benchmark based on its past performance figures and future objectives.

    References

    1. Loya, Arpit. Marketing audit–an important tool to determine strengths and weaknesses of the companies. International Journal of Multidisciplinary Management Studies 1, no. 2 (2011): 92-108.
    2. Rogers, David, and Don Sexton. Marketing ROI in the era of big data. The 2012 BRITENYAMA marketing in transition study (2012): 1-17.
    Frequently Asked Questions about Marketing ROI

    How is ROI marketing calculated?

    Marketing return on investment (ROI) is a performance evaluation method that measures the net return from an investment. We measure ROI by dividing net returns from the investment by costs.

    What is the best ROI for marketing?

    There is no 'best' ROI for marketing. Ideally, all marketers aim to have the highest return on investment for every project they invest in. The 'best' ROI for a company should be calculated based on the goals and objectives of the campaign on strategy.

    Why is ROI so important in marketing?

    ROI is important in marketing as it is a performance evaluation method that measures the net return from an investment. ROI helps marketers with marketing implementation and control. Part of the marketing process involves measuring performance and evaluating the differences between expected and actual performance which can be done through ROI. With such measures, marketers can take corrective action if required.

    What is a good ROI percentage for advertising?

    A good ROI percentage for advertising can be anything that's profitable for the firm. As marketing involves a wide range of strategies and campaigns, a company's ROI benchmark should be calculated based on its past performance figures and current or future objectives. 

    What is digital marketing ROI?

    Marketing return on investment (ROI) is a performance evaluation method that measures the net return from an investment. Recently, digital metrics have also played a key role in shaping marketing objectives and benchmarks. Measures like site traffic, click-through rate (CTR), conversion rates, search volume, etc., are shaping how we measure the performance and success of online campaigns. 

    Test your knowledge with multiple choice flashcards

    ROI serves as a performance evaluation metric that assesses the success of a campaign, strategy, or tactic in terms of ________ generated.

    It is always easy to measure marketing ROI.

    ROI is expressed as a percentage.

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