What is ROI in Marketing?
The old adage of, “you gotta spend money to make money” applies no more than when it comes to marketing. You could have the most revolutionary product in the world, but if nobody knows about it the business isn’t going to last very long. For that reason, we all know that marketing is an important element of any business, but even more important is a businesses ability to measure the effectiveness of its marketing. Enter marketing ROI. A return on your investment is the ultimate goal of any good marketing plan. Marketers want to know if their efforts are translating into revenue. Today it is easier to measure marketing ROI than it used to be thanks to the growth of digital marketing and the plethora of data available to today’s marketers.
As humans, we spend money on products all the time without specifically measuring their effectiveness. Take vitamins for example. We know vitamins are good for you, but we don’t measure our Vitamin C levels every day to make sure they’re working. However, if a bottle of Vitamin C cost $20,000, maybe you would.
Most companies spend a lot on marketing efforts. Globally, the amount of money spent on media is expected to hit $2.1 trillion annually by 2019.
What Are The Benefits of Measuring ROI?
On a very basic level measuring your marketing return on investment provides you 4 primary benefits:
1. Justifying your expenses. Small or big, if you’re putting dollars into a marketing campaign you want data that proves the money is well spent. Example, a restaurant spends money on a Facebook ad campaign. Their marketers want to know if the people who see that ad are actually coming into their establishment.
2. Determining the most effective efforts. Measuring ROI is typically done on a case by case basis. That way you can decide how to properly allocate your budget into the different marketing channels. Example: Data shows that your video ads seem to be translating into more customer conversions than photograph ads. In the future, you decide to invest more into video marketing productions.
Related: SEO ROI: How to Forecast SEO Profits
3. Ensures your marketers have the company interests at heart. If you’ve ever seen the TV show Mad Men, you might have noticed that the marketers talk exclusively about the creative aspect of their campaigns, and almost nothing about whether or not the client is going to make more money. That’s because back in the 60’s marketing wasn’t as heavily data-driven as it is now. The wittiest slogan was considered the most successful. Nowadays marketers have to place the company’s bottom line as priority number one, and personal creative goals number two. By frequently measuring MROI you keep your marketers accountable for every dollar.
4. Learn from your competition. Many companies have public financials. This allows other businesses in the same industry to learn about how they can better manage their marketing expenses and margins. For example, if you notice that a competitor is spending less than you on marketing, but seeing twice the returns, you can easily deduce that there’s a ton of room for improvement.
Challenges of Measuring ROI
Multiple touches – Touches refers to all of the company to consumer interactions it requires to turn a lead into a customer. For example, a customer journey through touches may look like this:
Initial brand awareness established > subscribes to email > receives marketing email > viewing of product tutorial > sees targeted ad > makes a purchase.
As you can see, there are so many points of marketing contact that it’s hard to measure exactly which touch created the most motivation to buy.
Measuring at the right time – Sometimes a marketing effort doesn’t pay dividends for a long time. A customer may love your ad and product, but have no need for it today. A year from now when they’re ready to buy, your ad pops into their head and they make a purchase. By then, chances are that campaign is long over, and you wouldn’t be able to classify the return on investment correctly. For this reason, marketers are challenged by choosing the optimal time to attribute a return to a specific campaign.
Uncontrolled variables – Circumstances outside of the companies control may be the reason for a change in sales. Maybe the economy is suffering as a whole or maybe it’s summer time and short shorts are making a come back. Lucky for you, your company specializes in short shorts. When extraneous circumstances are at play, it’s hard to know whether or not your marketing efforts are having an impact.
Variations in influence – Not everyone is affected the same by a marketing campaign. Example: The majority of people may see an advertisement and feel nothing. But perhaps that ad really resonates with one person, and they happen to make a huge purchase. This type of scenario makes it challenging to measure the efficacy of a campaign, and may skew the data.
What is considered a good ROI ratio?
Financially speaking, ROI is the ratio of net revenue versus cost. An easy way to simplify your ROI is by calculating the ratio. This ROI formula is done by subtracting the cost of a campaign from its net profit, then dividing that number by the original campaign cost. In an ROI formula that would be:
ROI = (Incremental Profit – Campaign Cost) / Campaign Cost
So with that said, what is a good ratio once you do your ROI calculation? 5:1 at the very least positive ROI you would want. If it helps you can look at this in dollars. For every $1 spent on marketing, you earn $5 in sales. In other words, most successful businesses spend no more than 20% of their revenue on marketing so they have a positive return. 10:1 is the benchmark for an extraordinary company.
How to measure ROI?
Beyond establishing a good ratio, there are a few common methods used to measure ROI. Bigger companies tend to dive very deep into data, utilizing multiple measurement methodologies. However, it can become very costly to do so, which contradicts the entire process. Here are some ROI measuring methods starting with the most common:
1. First & Last Touch Attribution
This method involves assigning credit to the first or last program to touch the sale.
For example, if you generated a lead at a sales conference and then months later closed a deal with them, attributing value to the sales conference would be first touch attribution. An example of last touch attribution would be assigning value to the use of a free trial right before the purchase, despite the lead being generated at a sales conference months earlier.
The is without a doubt the most common measurement procedure. It’s easy to apply, costs are low, it offers strong data points within the revenue cycle, and it’s tailored for investments in lead generation rather than lead nurturing.
Of course, it does have its pitfalls. It doesn’t factor in the impact of multiple consecutive touches, and it’s hard-pressed to recognize long customer journeys.
2. Attribution plus Revenue Cycle Projections
This method is the answer to time constraints, or rather a lack of time constraints; your marketing efforts today, might not pay off until way down the line.
Revenue Cycle Projections allow you to calculate the long-term affects of a marketing element. This is accomplished by using historical metrics to make projections. It also focuses more on analyzing the quality of leads versus the quantity of leads.
The downside is that historical metrics don’t factor in current market changes and extraneous variables.
3. Multi-Touch Attribution
A more comprehensive method for a marketer that factors in the variables in influence and the multiple touches required to convert a lead into a customer.
It generally involves working backward to analyze each touch and the magnitude of its impact on the deal. It can be a challenge to provide hard data that proves the exact impact of each touch, but when the data is easily observable, it’s highly insightful and can provide you with the right ROI metric for your company.
This method is most beneficial for companies with long customer journeys and revenue cycles. It attributes credit to all influences on the deal.
The downsides are that it may give credit where credit is not due, and it doesn’t account for extraneous variables.
4. Control Groups
Now we’re in a territory where measuring ROI starts to get expensive. Typically control groups and tests of that nature are only conducted by larger companies with money to burn. However, nothing really compares to the accuracy and effectiveness they provide.
Control groups are great for testing the details of individual marketing program elements. For example, you can get the answers to questions regarding,
Motivation: “Which video made you want to buy this product more?”
Public Relations: “Which brand seems more trustworthy?”
Customer Service: “Was that helpful, and why?”
5. Market-Mix Modeling
This is a holistic approach to measuring ROI. The methodologies behind this strategy become complex and formulaic, resulting in an increase expense of time and money. However, because it’s heavily reliant on statistical information you can build some extremely useful models that can be extrapolated over long periods of time and across multiple elements of your marketing programs. It also incorporates factors outside of your control, like those pesky economical trends.
The caveat is that it requires the collection of a lot of costly data and a devoted analytics team.
How does your company measure up?
Every company is structured differently, and when it comes to measuring ROI you can’t compare apples to oranges. Whatever methodology your company requires, it’s crucial to remember that the very nature of measuring marketing programs is extremely challenging. There are just so many variables to consider. That’s why the quality of measurement is endlessly more important than the quantity you’re measuring. In other words, rather than leaving things open to assumption, find out exactly what influenced a customer to buy, and why.