How to Calculate Your Marketing ROI
While marketing is not an exact science, there are ways to gauge its profitability. Here's our guide to effective marketing ROI analysis to help you determine if your money is well spent.
The simplest way to calculate the success of a marketing campaign is to integrate it into your overall business line calculation. This means taking the sales growth from your product line, subtracting all marketing expenses, and then dividing this figure by the marketing cost: ROI = (Total Sales Growth - Marketing Expenses) / Marketing Expenses.
So if your sales grew by $2,000, and your marketing campaign cost $200, then your simple ROI will come out to 900 percent.
Campaign Attributable ROI
While a simple ROI calculation provides some basic insight into your marketing success, it is based on some pretty huge assumptions. For one, it assumes that your total sales growth is a direct result of your marketing campaign. To get a better assessment, you will need to factor in monthly comparisons that show your sales in the months before you launched your campaign.
To get an even clearer assessment, however, you need to dig deeper by using a one-year campaign lead-up to determine an existing sales trend.
Let's say, for instance, that you have shown an organic growth of about 5 percent every month over the past year. To gauge your marketing ROI more accurately, you will need to strip out this 5 percent. This turns your equation to: ROI = (Total Sales Growth - Marketing Expenses) / Marketing Expenses - Average Organic Sales Growth.
So if your company is averaging a 5-percent sales growth before it begins a $5,000 campaign for one month - and your sales growth for that month jumps to $10,000 - the calculation will be: ($10,000 - $5,000) / $5,000 = 50% - 5% = 45%.
On the other hand, if a company has experienced negative sales growth over the past 12 months, it should view any slowing of that trend as a reflection of marketing success.
Once you have a pretty accurate calculation, you will need to consider the time period. Since marketing is a long-term process that fuels growth over time, it's best to make long-term assessments. While the ROI of the first few months might stay flat, it can take off once a campaign begins penetrating the target market.
Another consideration centers on the actual goals of a marketing campaign. While typically aimed at driving sales, marketing campaigns can also boost brand recognition. Because they can't be measured in dollars and cents with any real accuracy, however, these sorts of spin-off benefits should never be the core goal of any campaign.
There's also the matter of lead-generating campaigns: While some marketing campaigns are designed to drive conversions, others are aimed at increasing leads. In this case, a business must estimate the dollar value of a given lead by multiplying the upward - or downward - trend in new leads by historical conversion rates.
Whatever the case, it’s important to gather and maintain plenty of metrics, so you can use them to gain a clearer picture months or years down the line.
Making the Most of Your Money
While a good marketing campaign is essential to business growth, an ineffective one can torpedo a business. At the same time, it's important to give your campaign some time to show its full potential. Many businesses make knee-jerk reactions based on a few months of data. In most cases, it pays to wait at least a few months to see if your campaign is right for your target market. If you are still disappointed in your ROI at that point, you would be well-advised to try something different.