What Is ROI in Marketing and Why Is It Important?
If you’re thinking about launching a new marketing campaign, the first thing you need to do is check whether it’ll benefit your company or not. To measure how much revenue a certain campaign will generate, marketers check its ROI.
ROI is an acronym for return on investment. It’s a common concept in the business world. To give a straightforward answer to the question from the title of this article - “What is ROI in marketing?” - we can say it’s a strategy that helps determine how much money you spend on a marketing project vs. the amount of revenue you gain from it. As this is one of the vital calculations in marketing, we’ll focus on its purpose and explain how you can analyze the marketing ROI for your company.
The Importance of ROI in Marketing
Marketing professionals and business owners, in general, rely on data-driven evaluations to help them decide how to assign their marketing budgets. And that is where ROI steps in, as it allows marketers to develop a more successful strategy by using their resources more effectively. Now let’s see what the key functions and the true purpose of ROI in marketing are.
By calculating the ROI of multiple marketing campaigns, you’ll be able to see which one of them brings you the most value, and that can help you correctly prioritize campaigns to boost your company’s revenue growth. ROI will also shed light on which projects aren’t bringing enough revenue and possibly hurt your business. Once you measure the ROI of each campaign, you’ll be able to decide whether to reevaluate your marketing strategy or end some of those projects.
Selecting Future Projects
Once you learn how to prioritize your current projects, it’ll be easier to find a pattern to successfully target your audience in the future. Measuring ROI in marketing will help you learn from experience and develop new strategies when choosing your future projects.
Understanding Your Audience
One of the greatest advantages of knowing your ROI in marketing is that it allows you to better understand your audience and its behavior. It doesn’t just give you an insight into the numbers coming from various projects; it also shows which strategies have the best impact on your audience. Once you know that, it gets much easier to decide which type of advertising to go with to draw in new clients.
To fully answer the question “Why is marketing ROI important?” we shouldn’t overlook client satisfaction. If you work in a marketing agency and your clients are other businesses, one of the most important things to keep in mind when creating a new marketing strategy is how you’ll present it to your existing and potential clients. Apart from reliable CRM, which has already become a common practice among real estate companies, brokerages, and many other businesses, incorporating the predicted ROI of your campaign into the presentation is also something that can boost your clients’ trust.
Knowing how to define your ROI in marketing and measure it correctly can take you a long way. However, many experienced marketers go one step further and compare their marketing ROI with that of their competitors. This helps them determine how their marketing campaigns relate to others in the industry in terms of efficiency. Studying the business strategies of your competitors who have a higher ROI percentage can give you an idea how to improve your own business.
Better Budget Allocation
The ultimate goal of understanding ROI in marketing is better budget allocation. Marketing budgets are always lower than you’d like them to be, so learning how to use the funds you do have at your disposal wisely is essential. To achieve better results, you need to know which projects require less investment but bring more revenue.
How To Calculate ROI in Marketing
The easiest way to determine your marketing ROI is to compare your revenue to your marketing expenses.
One of the simplest equations for calculating ROI is:
(Revenue − Investment) / Investment
If, for example, you invest $10,000 in a particular project, and generate $20,000 from it, your ROI formula will look like this:
($20,000 − $10,000) / $10,000 ＝ 1
To calculate your marketing ROI percentage, you should multiply this final number by 100. In this case, your marketing ROI would be 100%.
There are a few things to keep in mind when calculating your marketing ROI. Here, we’ll go over each in more detail.
Set a Time Frame
One of the crucial things when determining your marketing ROI is to set an appropriate time frame for data gathering. If you wish to see if your latest marketing campaign was a success, you need to allow enough time for it to reach your clients before looking for a return on your investments. Also, be consistent and use data from the same business cycle.
Measure the Marketing Cost and Sales Growth
Now that you know the meaning of ROI in marketing and its importance, your next step should be to collect all the relevant financial data about your marketing project. If you need to calculate an ROI and have a large amount of data to process, seek help from the bookkeepers and accountants. Consider keeping a marketing record where you could enter all your ROI calculations to gain insight into which factors influence your marketing ROI the most.
What Is a Good Marketing ROI?
Marketing ROIs are usually expressed in ratios. What is a good ROI ratio in marketing? You should aim for a 5:1 ratio at least. Anything below a 2:1 ratio is considered unprofitable; anything below 1:1 is negative ROI, while an ROI ratio above 5:1 is deemed to be strong for most businesses.
When calculating your ROI, you should factor in all the marketing costs your campaign will incur, including:
- Pay-per-click spend
- Media spend
- Content production costs
- Outside marketing and advertising agency fees
Make sure you don’t overlook anything because understating your costs will result in an incorrectly calculated and unrealistic ROI.
Marketing ROI Examples and Strategies
Now that you’re familiar with some basic reference values, let’s go through a couple of practical examples.
PPC is an advertising model in which you pay a certain provider to promote your ad based on the number of user clicks on your ad, whether or not it leads to a sale. The ROI formula can help you track your ad performance and manage your PPC campaigns. For example, according to some PPC stats, Google search ads have an average ROI of 200% - for each dollar invested, marketers gain $2.
For what else is ROI in marketing used for? For assessing the profitability of video marketing campaigns. Although video marketing can be pretty expensive and time-consuming, video marketing statistics indicate that 88% of marketers are satisfied with their social media video marketing ROI.
Even though many think sending emails is outdated, it’s still one of the key marketing tools. Recent statistics show that email marketing is the most effective way to promote your business. This type of marketing brings $40 back for every $1 spent, so it comes as no surprise that many marketers see it as their number-one tool for revenue generation.
Paid Social Media Promotions
We already know the importance and numerous benefits of ROI in marketing. Now let’s see what it can tell you about the effectiveness of your social media promotions. Suppose your company targets an audience that regularly uses social media platforms such as Instagram, Facebook, or Twitter. In that case, you might think about boosting your posts to get promoted on the newsfeeds of your targeted audience. Tracking the ROI of your campaign can help you see if this strategy works for you and determine the types of posts that lead to the revenue increase.
If you look at social media marketing stats, you’ll notice that 94% of marketers use Facebook in their marketing campaigns. This isn’t surprising as Facebook is the biggest social media platform, with about 2.89 billion monthly active users.
The Bottom Line
Understanding ROI in marketing is a vital part of any marketing campaign. And even though calculating it might get complicated, it comes with great benefits. It enables you to gain a better insight into your marketing strategies, how they need to be tweaked, and determine your future marketing goals.
Your marketing decisions and marketing budget should be based on fresh, verified, and detailed data - only then will you be able to calculate your ROI properly, adjust your business strategy, and ultimately, improve revenue growth.
ROI in marketing can be explained as a way of measuring the return on the money invested by a company in marketing campaigns. Knowing how to calculate your ROI is one of the basics of any serious marketing strategy.
You can use a simple formula to calculate the ROI of any marketing campaign. All you need to do is take the sales growth from a particular campaign (measured in dollars), subtract the marketing costs, and divide that number by the marketing cost. Multiply the result with 100, and you’ll get your marketing ROI percentage. To learn more about the purpose and benefits of calculating your ROI, read our “What Is ROI in Marketing and Why Is It Important?” article.
A good or positive ROI is the one that has a 5:1 ratio. Anything that goes below 2:1 is considered a bad and non-profitable ROI, while an exceptional ROI has a ratio of about 10:1.
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