What is marketing ROI?

What is marketing ROI? It’s the return on investment (ROI) that marketing quantifies to justify how marketing programs and campaigns generate revenue for the business.

ROI is short for return on investment. And in this case, it is measuring the money your company spends on marketing campaigns against the revenue those campaigns generate.

Why is ROI important?

Before starting any new campaign it's important to understand your numbers. They might be estimates at first, but even having benchmarks can help you set a target to measure your campaign's success. Today’s marketing is no longer a simple matter of “getting traffic.” It’s a complex process with multifaceted strategies across digital and traditional platforms.

To make informed decisions about where to spend your time and budget, you need to know the cost of each strategy. Once you understand your marketing costs, you can make better decisions to create revenue streams that make your business more profitable.

There are several types of marketing ROI:

• Revenue/bookings
• Cost per acquisition (CPA) ratio
• Sales cycle days
• Engagement duration
• Customer lifetime value (CLTV)

It's important to know the difference between each type. For example, revenue/bookings are measured in either net sales or bookings. CPA, on the other hand, is measured in either sales or marketing leads. Regardless of the ROI you choose to track, most of them are calculated in the same way.

Ways to calculate marketing ROI

Using cost ratio to determine ROI

Alternatively, you can track marketing ROI by looking at the cost ratio, or efficiency ratio. This formula calculates how much money is generated for every marketing dollar spent.

The cost ratio = revenue generated: marketing dollars spent

An efficient marketing campaign may result in a cost ratio of 5:1—that is, $5 generated for every $1 spent, with a simple marketing ROI of 400%. An excellent campaign might see a cost ratio of $10 generated for every dollar spent (10:1) with a simple marketing ROI of 900%.

NOTE: Simple ROI = (sales – marketing cost)/marketing cost

Using direct and indirect revenue attribution

Most marketers measure the marketing ROI of programs via either direct or indirect revenue attribution. With direct attribution, all of the revenue from a sale is attributed to only one marketing touch. In the example above, most marketers would credit the last touch before the prospect buys. With indirect attribution, the revenue from the sale is apportioned evenly across all touches.

Marketers should stop choosing direct over indirect attribution and instead use both. In this model, marketers can compare the programs that were most effective at getting prospects to buy with those that were influential across multiple sales. That way marketing ROI becomes a key component of an enterprise revenue performance management strategy.

Are your marketing investments paying off?

Bidding for keywords. Commissioning content. Sponsoring events. Putting logos on NASCAR vehicles. Marketers make hundreds of buying decisions as they seek to achieve their objectives. But how can you be sure your investments are truly paying off? And how can you make continual improvements in your investments? If you want to understand how your buying decisions affect your organization’s overall growth and revenue objectives, focus on calculating your marketing ROI.

The challenges of calculating marketing ROI?

Calculating marketing ROI seems like it should be easy—especially when you consider that today’s marketers have access to powerful reporting and tracking tools through web analytics, customer relationship management (CRM) systems, and cross-channel marketing analysis. Marketers can use these tools to track the money they spend on marketing programs that generate sales and revenue. How hard could it be to connect the dots?

Unfortunately, it’s sometimes difficult to attribute marketing ROI to any one program or campaign. Here’s why: suppose your organization spends heavily on social media. A specific Tweet brings a prospect to your website (easy to measure via web analytics), where she signs up for your newsletter (easy to measure via a marketing automation system). So far, so good.

But what if the prospect doesn’t end up buying anything from your organization for months? Meanwhile, she visits your organization’s website four times, clicks through on three marketing newsletter articles, downloads information, and also attends an event.

Which of these touches should receive credit for the revenue? Should it be the first touch—the original Tweet? Or should it be the newsletter, which obviously appealed to the prospect because she opened each issue and even clicked through on three articles? Or what about the event, which was the last touch before the prospect finally became a customer?

Determining customer lifetime value (CLV)

Customer lifetime value is the total worth of your customer’s business throughout the entire duration of their relationship with your company. It is an important metric because it costs less to get more business from an existing customer than to acquire a new one, so focusing your marketing efforts on your existing customers is a great way to drive growth.

Customer lifetime value, or CLV, goes hand in hand with another key metric we've already discussed: customer acquisition cost. Customer acquisition cost is the money you invest to get a new customer to purchase your product or service, including advertising, marketing, and special offers. The value of the customer's purchases throughout their entire lifecycle is important to remember when considering customer acquisition cost.

Let's say it costs you $15 to attract a new customer. The total sales you can expect per customer is your average order value, divided by one, minus the repeat purchase rate (50% + 1% = 0.1% = $55.56). Subtract your customer acquisition costs, and you get a lifetime customer value of $40.56. Subtract your purchase costs to determine the full customer lifetime value.

Let’s break down the calculation of customer lifetime value. In other words, for your CLV calculation, you need to calculate the average order value and multiply it by the customer's repeat rate. You can find the customer’s repeat rate by checking your organization's records to find out how much revenue has resulted from their purchases over a given period (for example, one year) and how many purchases have been made in that period.

Brand loyalty is another critical factor when considering the value of a customer’s business over time. Customers who are loyal to your brand will keep coming back and continue to purchase from your company. If a customer does not feel any loyalty to your brand, a competitor could lure them away—and there goes your investment. Which is why it is so important to continue to invest in your existing customers with loyalty programs, check-in emails, and other marketing efforts so that they continue to generate revenue.