Almost every marketer will get this from their boss:
" With every marketing dollar that I spend, what is the ROI that we're looking at?"
Instead of trying to search over the internet to look for the best formula which may or may not work for you, we took the liberty to compile a few useful tips which may be useful for you
What Is The Revenue To Cost Ratio?
The revenue to marketing cost ratio represents how much money is generated for every dollar spend in marketing. For example, five dollars in sales for every one dollar spend in marketing yields a 5:1 ratio of revenue to cost.
What Is A Good Marketing ROI?
A good marketing ROI is 5:1
A 5:1 ration in the middle of the bell curve. A ratio over 5:1 is considered strong for most businesses, and a 10:1 ratio is exceptional. Achieving a ratio higher than 10:1 ratio is possible, but it shouldn't be the expectation.
What Is Counted As A Marketing Cost?
When calculating your ratio, a marketing cost is any incremental cost incurred to execute that campaign (i.e. the variable costs). This includes:
- Pay-Per-Click Spend
- Display Ad Clicks
- Media Spend
- Content Production Costs
- Outside Marketing and Advertising Agency Fees
Because full-time marketing personnel costs are fixed and they are NOT factored into this ratio.
The ratio is meant to give campaigns a simple "pass/fail" test, so the costs factored into the ratio should only occur if the campaign runs.
Why Is 5:1 A Good Ratio?
At an absolute minimum, you must cover the cost of making the product and the cost to market it.
A 2:1 revenue to marketing cost ratio wouldn't be profitable for many businesses, as the cost to produce or acquire the item being sold (also known as cost-of-goods-sold, or COGS) is about 50% of the sale price. For these businesses, if you spend RM 100 in marketing to generate RM 200 in sales, and it costs RM 100 just to acquire the product being sold, you are breaking even. If all you accomplish with your marketing is break even, you might as well not do it.
Companies with higher gross margins (their COGS are less than 50% of the sales price) don't need to achieve as many sales from their marketing before they become profitable. Therefore, their ratio is lower.
Meanwhile, companies with lower margins (their COGS is MORE than 50% of the sales price) need to be stretch their marketing dollars further before it becomes worth doing. Their ratio would have to be higher.
Why Lifetime Value Is Critical When Calculating ROI
Lifetime value refers to the value a customer brings a business over their entire life as a customer, NOT just through their first transaction with you.
Many businesses only think in terms of first transaction value and call it a day. But the customer life can be far more fruitful than that, so to accurately calculate return on investment, we need to understand the full return.
The chart at the beginning of this post showing $500k inn revenue on $112k spend? This client had achieved the 5:1 revenue to spend ration, but that's not the whole story. Prior to adding repeat purchases to this chart, the return on PPC looked a lot different. And it wasn't pretty.
When we only counted first sale revenue from PPC and not lifetime value, we weren't even achieving a 2:1 ratio.
And here's how the cumulative difference between the first sale value and lifetime value looks over time.
The spend never changed, but our perception of the campaign's impact on revenue (and ultimately ROI) changed dramatically
Target ratio can be calculated when these factors are included:
Company's gross margin targets
Overhead expenses
What it takes for money to hit the bottom line (The Ultimate Goal)
Keep in mind that achieving a 10:1 ratio every time is unrealistic and shouldn't be the expectation for your marketing campaigns. For most businesses, a 5:1 ratio will be the target, and anything beyond that is gravy.
Alternative Measurement Simplest Way To Calculate ROI?
This is an alternative measurement which proves to be the simplest way to calculate your Marketing ROI:
(Revenue - Investment) / Investment
Let's say that you've invested RM5,000 in marketing spend and you've generated RM10,000 in revenue from those channels. Your formula would look like this:
You then multiply the answer by 100 to get a percentage. In this case, your marketing ROI is 100%
To calculate this formula, you need to know that your marketing channels have actually generated the ROI.
Calculating Campaign Attributable ROI
The Simple ROI is easy to do, but it is loaded with a pretty big assumption. It assumes that the total month-over-month sales growth is directly attributable to the marketing campaign.
To really get at the impact, you can get a little more critical. Using a 12-month campaign lead up, you can calculate the existing sales trend. If sales are seeing an organic growth on average of 4% per month over the last 12-month period, then your ROI calculation for the marketing campaign should strip out 4% from the sales growth.
So, let's say we have a company that average 4% organic sales growth and they run a RM10,000 campaign for a month. The sales growth for that month is RM15,000. As mentioned, 4% (RM600) of that is organic based on historical monthly averages. The calculation is as shown below.
Holding Yourself Accountable for Marketing Spend
When it comes to ROI, you always want your business to fall on the positive side of the equation. When you get into negative ROI. Your business haemorrhages money.
That's never a good thing.
You must hold yourself accountable to every marketing channel you target. Is it generating leads, conversions, and revenue? If not, can you tweak your approach to improve its performances? Or do you need to abandon it in favour of another strategy?
Let's say, for instance, that your email marketing campaign suffers from low open - and click - through rate. You're sending emails that get thrashed or ignored.
You could stop emailing your prospects altogether, but the answer likely hides in your approach. To improve open - and click - through rates, you could:
Adjust your subject lines
Include more internal links to your website
Provide more value in the form of actionable content
Offer discounts and coupon codes
Host contents
These strategies might boost your email marketing ROI and make it reasonable channel for your marketing efforts.
Final Thoughts On Calculating Marketing ROI
It is not easy to calculate revenue generated for all marketing activity. Certain tactics like social media, content marketing, video, and display ads for a targeted audience starts long before a purchase takes place.
Marketing software platforms such as Hubspots, Marketo, and Pardot do a good job of connecting early engagement to a final sale, but they are not perfect.
Just because a marketing activity can't be measured perfectly, it doesn't mean it shouldn't be considered.
That being said, marketers should always work to connect the dots between activity and revenue. Advances in web analytics software and methodology provide better insights for measuring activity over time and across different devices.
Finally, marketing is about generating revenue. It's not about art, humour, or creativity.
Marketers who aren't serious about tying their activity back to revenue are missing the bigger picture.
Implementing a ratio and treating it as the "golden metic" for marketing activity, will focus the team on the ultimate outcome: growing the business.
Bonus Tip: Comparing Your Marketing Efficiency With Your Competitors'
Another way to start calculating your marketing ROI is to compare your efficiency and effectiveness with your competitors' marketing strategies.
How to do it?
Start by investigating your top three competitors' websites
How many pages does each website have?
How many people comment on their blog posts?
Do they have social sharing buttons and counters?
What do their engagement numbers look like?
From there, analyse your competitor's social media presence.
How many accounts do they have and with which platforms?
Do they get comments, feedbacks, retweets, and other forms of engagement?
How quickly do they respond to followers?
You can compare your SEO, email marketing campaign and content marketing efforts to theirs. How often do they connect with subscribers or readers? Do they dominate the social conversations in your niche?
The more you learn about your competitors and their marketing efficiency, the easier it becomes to rise above them.
References: