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 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 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.

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.

$\mathrm{Marketing}\mathrm{ROI}=\frac{\mathrm{Net}\mathrm{Return}\mathrm{from}\mathrm{Marketing}\mathrm{Investment}}{\mathrm{Cost}\mathrm{of}\mathrm{Marketing}\mathrm{Investment}}$

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

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.

$\mathrm{Marketing}\mathrm{ROI}\hspace{0.17em}=\frac{\mathrm{Sales}-\mathrm{Cost}\mathrm{of}\mathrm{Marketing}\mathrm{Investment}}{\mathrm{Cost}\mathrm{of}\mathrm{Marketing}\mathrm{Investment}}$

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

$\mathrm{Marketing}\mathrm{ROI}=\frac{\mathrm{Income}\mathrm{Generated}-\mathrm{Cost}\mathrm{of}\mathrm{Campaign}}{\mathrm{Cost}\mathrm{of}\mathrm{Campaign}}$

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.

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.

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.

In other words,

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 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.

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.

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.

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: