Tracking your expenditures to gauge their efficacy is the main goal of ROI marketing, also known as return on investment. With the help of this little tutorial, you will be able to distinguish between effective advertisements and those that are wasting your money and producing subpar results.

Influencer marketing, email marketing, digital marketing, and content marketing are three well-liked strategies for spreading the word about your goods and services.

However, how is the ROI determined for each of these channels? Don’t worry, we’ll run the calculations and go over the key elements that can help you improve your sales and success rate. Find out about some of the most important obstacles to marketing ROI measurement and how you get beyond them.

You may achieve better results and discover which marketing tactics appeal to your target market by knowing the marketing ROI formula, utilizing PPC and other successful marketing techniques, and selecting the appropriate tools.

The return on investment of your marketing expenditure is the main emphasis of marketing ROI. Utilize this indicator to ascertain whether certain advertisements or complete marketing campaigns have been successful in drawing in more clients and raising sales figures.

There are various advantages to comprehending the definition of ROI in marketing for both small and large firms, including the following:

Proving efficiency in marketing spend

Knowing how to calculate marketing ROI gives you quantitative proof of how well or poorly each ad performs. It also gives you something to put in front of decision-makers and leaders who wonder what they’re getting for their money.

Distributing your ad budget wisely

When you calculate return on investment at the campaign level, you can tell which strategies you should continue to pursue. For example, if you have a Facebook ad that’s performing better than an Instagram ad, you might want to budget more of your marketing dollars for the one that works best.

Comparing how you’re competing in the market

Track the return on investment of your competitors and compare it to your own. You can use public information and financial statements, if available, to find out if your marketing campaign has increased your footprint.

Holding yourself accountable

While telling a good story can help you engage new customers or improve customer relationships, it’s all about the sales revenue numbers. The marketing return on investment calculation shown below can help you justify every advertising dollar spent.

What is ROI in marketing? Ultimately, it’s the measure of your success or failure at responding proactively to your ad campaigns and any other digital marketing strategy. So, get ready to cut anything that doesn’t generate leads or interest that also improves profit and revenue growth.

What is a Good Marketing ROI?

ROI marketing should aim for a 5:1 ratio at a minimum; optimal results could reach a 10:1 ratio. ROIs under 2:1 haven’t brought in enough money for you to keep going, though. This ratio must be larger due to the expense of creating items and delivering them to the public.

Products with less than 50% of their expenses in overhead are an exception to this rule. Low-cost goods and services can turn a profit at smaller ratios. Think on aspects particular to your industry, such as distinct margins and costs.

There is a lot of space for improvement, for instance, if you accomplish high ROI marketing but don’t make as much as your competitors.

How to measure marketing ROI : [((number of leads x lead-to-customer rate x average sales price) – cost or ad spend) ÷ cost or ad spend] x 100.

ROI formula marketing example:

A company spends $1,000 on creating and placing ads. They receive eight clicks and six orders as a result. They calculate they’ll make around $2,000 on each new customer.

Here’s how to figure out its ROI: [((8 x 0.75 x $2,000) – $1,000) ÷ $1,000] x 100 = 1100%

This example emphasizes the importance of customer retention to improve your ROI.

To use the marketing ROI formula, collect the following information:

• Number of leads: Those interested in a product.
• Lead-to-customer rate: Percentage who buy a product.
• Average sales price: Cost of product minus discounts.
• Cost or ad spend: Cost to create and publish ads.

Looking at other elements besides revenue can give you a better idea of the true cost of marketing.

Additionally, the amount of traffic to your website and responses on social media are examples of how viewers might respond to your marketing efforts. Establishing a relationship with a customer could involve either of these steps.

It’s important to understand what marketing strategies work for different products and services. What is the ROI meaning marketing professionals follow most closely? Keep reading for examples of how to calculate your return on investment for different marketing efforts.

Why can Marketing ROI be Difficult to Measure?

When calculating your marketing ROI, there are assumptions to consider based on this formula: 

Increased Sales – Marketing Spend / Marketing Spend = Marketing ROI

Here’s a closer look:

Increased sales

Not all of a business’s sales are driven by marketing. Some sales come from repeat customers who would’ve purchased anyway, while others are through salespeople or customer referrals. To calculate increased sales from marketing, you will need a way to attribute your increased sales to your marketing. There are a few ways to do this:

• Direct marketing. Direct marketing is any marketing that directly asks people to buy a product or service. Examples include digital advertising, direct mail, and email. You can attribute increased sales to the use of coupon codes or digital cookie tracking, although these methods may underreport ROI since not every customer who sees your campaign will accept or use these strategies. 
• Brand marketing. With this type of marketing, you are building a relationship between consumers and your brand to help influence future purchase behavior and increase customer loyalty and sales. Brand marketing applies to campaigns such as sponsored content and TV advertising. You can attribute increased sales to brand marketing by measuring sales before and after a marketing campaign, which can be windows of a week, month, or quarter, for example, depending on the campaign—but this is an approximation.
• Multichannel marketing. Multichannel marketing is a strategy that uses a combination of channels such as social media, email, and website promotion to increase a consumer’s opportunity to buy. You can attribute increased sales to multichannel marketing by using your CRM (customer relationship management) data to categorize sales by new customers and existing customers—and concentrating on sales from the former.

Marketing spend

Marketing spend is the amount of money spent on marketing initiatives. When calculating marketing costs, it’s important to be honest about the true cost of a marketing campaign. A common example that illustrates this consideration is a social media advertising campaign. 

Read Also: What is the Formula for ROI in Social Media Campaigns?

If a brand’s ad spend on Instagram ads is $10,000 and the return is $40,000 in revenue, the assumption might be that the marketing spend is $10,000 and the marketing ROI is 3 ($30,000 / $10,000). However, there are often other marketing expenses associated with Instagram ads, such as the production of the ads’ creative development and management of the campaign’s performance and optimization by either staff or an agency. 

A true marketing ROI calculation considers this full scope of cost. Even if you are managing the campaigns and writing the copy yourself, it’s best practice to consider the cost value of your time. Even if you don’t pay yourself by the hour, you can use an assumed market rate for your time to estimate that cost.

Marketing ROI

Once your business has considered its increased sales and spending assumptions, the ROI calculation is pretty straightforward. However, what can be less clear is understanding what a good ROI is for your business.

An acceptable marketing ROI will differ from business to business. For example, retail, ecommerce, and consumer goods tend to have the highest email marketing ROI. Generally, business owners want their marketing ROI to be profitable (greater than 0), meaning the profit from their marketing’s increased sales is greater than their cost.

However, some businesses will accept an unprofitable ROI if their goal is to grow as fast as possible. Ultimately, the right target marketing ROI is the one that aligns with your business’s expectations and forecasts.

Measuring your marketing ROI will provide insight into which campaigns are performing best and whether your marketing efforts are improving or deteriorating. Measuring marketing ROI also provides the following benefits:

• Decision-making about your marketing budget. You can compare the marketing ROI of each of your marketing campaigns to understand where to invest further. Higher ROI marketing campaigns tend to be a better investment.
• Overall marketing performance. All else equal, if your business’s marketing ROI is improving, that suggests your marketing is increasingly effective.
• Assumption considerations. By going through the exercise of considering how you attribute increased sales and calculate true costs, you will give your business more clarity on its overall performance.

Which Form of Advertising has the Highest ROI?

Purchasing advertising is a good approach to getting leads. Regardless of the channel you select, you must evaluate each one’s value by determining its results. To get the most out of your paid advertising efforts, find out which tactic has the highest return on investment before you get started.

Pay-Per-Click Advertising

Most paid advertisements operate on a pay-per-click (PPC) model. This option allows businesses to pay each time someone clicks on the ads they put up. PPC is a form of paid advertising that provides the highest ROI because of its ability to reach your intended target. They direct the ads to bottom-of-funnel customers or those ready to make a purchase. PPC ads can be tailored based on various advanced targeting options such as interests, location, and device for more effective lead generation. On average, companies that utilize this strategy receive an ROI of $2 for every $1 spent.

Paid Social Media Advertising

Paid Social media is a method of displaying ads across different platforms to target specific audiences. Many people utilize PPC, influencer-generated content, and responsive ads to attract more leads. Let’s talk about the top three platforms that reap the highest ROI.

Facebook Advertising

It is practical to utilize Facebook to market your brand, considering it’s the third most used website in the US. There are endless targeting options to explore that cater to different industries. Additionally, Facebook allows you to integrate your ads to Instagram to double your lead generation capacity. The average ROI for Facebook advertising is 450%.

Twitter Advertising

Other platforms allow you to tailor your demographics based on location and interests. Instead, Twitter allows you to target your audience through relevant keywords. This option indicates that you need to stay on top of the current trends to maximize your paid advertisements. So, it becomes more effective to start an engaging conversation on Twitter, and then promote it through Twitter advertising. Most businesses partner with Twitter personalities/influencers to get their foot in the door.

In fact, 40% of Twitter users purchased after seeing a Tweet from these groups of people. Studies also found that Twitter advertising performed better compared to other social media platforms with a nearly 40% higher ROI compared to the average ROI of other media investments. The return is averaging $2.70 for every dollar spent on Twitter ads.

Google Advertising

Google Ads is one of the most efficient ways to market your brand. There are more than 160 billion Google searches each month, which can quickly help you gather valuable leads. It also allows you to research each of your potential keywords and determine the price to pay for every click. On top of that, you can maximize your ROI by utilizing responsive ads. This opportunity provides one of the highest ROI allowing you to receive $8 for every $1 you spend.

How to Improve Marketing ROI

Once you’ve measured your marketing ROI, there are three steps you can take to improve your returns over time:

1. Scale winners

In any marketing strategy, some elements perform better than others. The first step is to identify what’s working best within existing campaigns and invest more in those areas.

For example, if your main marketing channel is social media advertising, you may find that a specific audience, such as a first-party/lookalike audience with similar shared characteristics as your current audience, performs best. The most likely path to improve ROI is to spend more on that audience while spending less on others. Some digital advertising platforms give advertisers the option to automatically optimize toward high-performing audiences.

2. Run tests

One of the best ways to unlock improved marketing ROI is to test new strategies and tactics. These tests won’t always pay off, but when they do, they can lead to improvements.

For example, if your main marketing channel is paid search, you may test expanding into organic search engine optimization (SEO). If this new channel proves to have a high ROI, it will improve your overall ROI while improving sales.

3. Improve attribution

If unsure whether you’re ready to scale your winners or run additional tests, you may have an attribution problem. This refers to your ability to understand the extent to which your marketing efforts drove sales. When many marketers hear “attribution,” they think of web analytics and their cookie/pixel tracking. This is certainly part of it.

But understanding attribution is more than just a technical challenge. It’s strategic, too. Businesses can improve their attribution by gaining a deeper understanding of the customer lifetime value of each new customer their marketing acquires and what percentage of new sales were due to organic word of mouth or other non-marketing factors.

Why is ROI Important to Advertisers?

When your campaigns generate more revenue than you spend on them, you have a high return on investment (ROI), which is what you desire. Budget waste bothers no one, especially in these hard times when money is tighter. You can determine which marketing initiatives are most effective by calculating your return on investment. As a result, you can reallocate the marketing budget from underperforming initiatives to the things that are really driving that crucial revenue.

The most important question is, why measure marketing ROI? Simply put, if you can’t engage new customers profitably, why bother?

ROI measures the amount of profit or loss, your business generates through your marketing activities. The ideal marketing ROI scenario is when the profit you make exceeds what you invested in your marketing activities. In other words, it’s money well spent that’s ultimately enabled you to generate revenue.

To hit your revenue targets in the most efficient way possible, you need to invest in activities that are generating the most profit and identify which ones are just burning up a budget. An underperforming marketing campaign isn’t commercially viable, as your operational costs are likely to impact your ability to break even let alone turn a profit. Measuring marketing ROI helps you figure out what drives the most sales at a granular level. You can analyze each campaign, channel, and keyword to see where those high-value orders are coming from.

This enables you to make data-driven decisions about where you should and shouldn’t be focusing spend, and you can prevent under or over-valuing specific activities in future campaigns. So, if your PPC campaigns aren’t delivering any leads but social is consistently generating sales, you can re-allocate the PPC budget to drive even more activity through social.

It’s important to note that monitoring your marketing ROI needs to be a rigorous and ongoing process. The last thing you want is to take your eye off the ball and lose sight of the data that will help you put the pennies where it matters most to drive maximum profits with minimum spend.