Marketing campaigns are investments in your company.
As with any investment, marketing campaigns need to be monitored, measured and compared to other investments to ensure you are spending your money wisely.
Return on investment (ROI) is a measure of the profit that results from each investment.
ROI is calculated as a percentage. In other words, it’s the percentage of profit you earn after you subtract out what you spent on the investment.
Figuring ROI calculations for marketing campaigns can be complicated, since there may be many variables on both the profit side and the investment side. However, understanding how to calculate ROI is critical to producing the best possible results with your marketing investments.
By knowing how to calculate your ROI, you can focus on campaigns that deliver the best result and you will know how to spend your marketing budget. For example, if one campaign yields a 10% ROI while another generates 50%, where will you choose to invest your money next time? The answer is obvious!
ROI helps you improve your ongoing marketing campaigns. Monitoring your ROI will allow you to identify what is working for you, and which variables yeild the best performance.
During tough times, companies often cut back or eliminate their marketing budgets – a dangerous move since marketing is an investment to produce revenue. By determining return on investment, you can help your company move away from the idea that marketing is an unnecessary expense that can be cut when times get tough. ROI will justify marketing investments.
When it comes to ROI, you have three options. 1. Not have track your ROI. 2. Calculate some of your ROI. 3. Measure and track all of your investments.
In the worst case scenario, when you don’t track your ROI or measure the performance of your investments, your company will not know what works and what doesn’t, and will struggle to meet its goals. If you track some of your ROI, you will have a general idea of how your marketing dollars are working for you, but you won’t know the exact percentage of profit you are generating from your campaigns, therefore you make the mistake of cutting the budget in tough times. In the ideal situation, you measure and track all of your marketing campaigns and you know what ROI each campaign is generating. With this model, your company understands and supports the ongoing marketing investments you make because there is solid data to support the investment and identify the return.
Steps in Effective ROI Strategy
You are in business to make a profit. Therefore, it is a good idea to measure ROI on all of your marketing investments. Take a look at your sales process. If it is long and complex, you may choose to modify it to make your ROI calculations simpler.
Establish Your Formulas
There are several figures you’ll need to calculate your ROI:
- Cost of goods sold (COGS): The cost to produce a product or service. This includes costs of materials, vendors and subcontractors that go into physically producing the product or service.
- Marketing investment: This includes just the cost of the media, for example the cost to place an advertisement in a publication or the cost of the air time to run a commercial.
- Revenue: This is the income from the sales that are generated from the campaign. It can be tricky to tie revenue to a specific campaign, especially when you run a variety of campaigns and have a long sales process. There are ways to simplify this, for example having dedicated phone number for each campaign, or having a specific landing page on your website that track visitors for each campaign. Tools such as Constant Contact allow you to track results from email campaigns.
Determine an ROI Goal
Set an ROI goal for your individual campaigns and entire budget. This will give you more power over your budget and provide you a way to measure and compare results. Determine a threshold and floor for each campaign. Only run a campaign if you project that it will hit the threshold. Otherwise, cut it and put your money elsewhere.
Set the Marketing Budget
There is no “one-size-fits-all” answer to the amount a company should invest in their marketing budget. But by establishing your ROI goal and profit goals, you will be able to calculate the amount of money you should spend on marketing and you’ll feel confident that you’re spending the right amount of money to meet your goals.
Calculate, Track and Improve Your ROI Results
By developing and committing to a managed tracking and reporting process, you can build solid measurements, even if you have a complicated sales process. Do your best to estimate figures, if needed. The trick is keeping consistent in tracking, monitoring, and evaluating your campaigns.
ROI strategy is a process. Use your ROI formula to continually test new ways to improve your campaigns; then focus on investing your money in the campaigns that produce the greatest return for your company.
The more you understand ROI, the more control you have over your marketing investments. By continually studying and improve your reporting capabilities, you will be able to use ROI to improve your campaigns and generate more profit for your company.