Marketing ROI – Define, Measure, & Improve Your ROMI
Jan 22, 2021|Read time: 13 min.
- Marketing ROI is a critical metric because it reveals how effective your marketing activities are.
- Learn how to calculate ROI in marketing to keep focused on what matters rather than vanity metrics.
- Track and measure both short-term and long-term marketing ROI so you can compare the effectiveness of your marketing mix across multiple channels.
As of this writing, there are 23 Marvel movies and 14 more in development. There are 12 Marvel television shows. That’s a lot of Marvel content. What does Marvel have to do with marketing ROI?
A lot, when it comes to marketing return on investment (ROI). There’s so much Marvel content because it has a huge marketing ROI. Marvel created a flywheel that accelerates with every new release. For every dollar they spend marketing these movies, they make a lot more back in revenue.
For example, for Guardians of the Galaxy Vol. 2, Disney spent roughly $80 million on the marketing and promotion of the film. (The overall budget appears to have been $200 million.) The film has grossed $863,756,000+ worldwide. That’s a roughly 10.7X multiple of the marketing budget. Not too shabby!
Even when Disney decides on a larger marketing budget, it brings in a massive ROI. With Avengers: Endgame, Disney spent roughly $200 million on the marketing and promotion of the film. (The overall budget was around $356 million.) Avengers: Endgame has grossed $2,797,800,500+. That’s more than a 13.9X multiple of the marketing budget. Yowza!
Ultimately, CMOs have a very clear and simple objective: Turn money spent into significantly more money made.
In this guide, I’ll break down how to measure, calculate, use, and improve your marketing ROI to dramatically grow market share and total revenue.
What is marketing ROI by definition?
Marketing ROI is the amount of revenue generated by specific marketing activities compared to the costs involved. It’s a ratio that compares the gain from a marketing investment relative to its cost, and it’s often expressed as a percentage.
When you learn to calculate ROI on marketing you can determine how effective your marketing activities are, down to specific channels and individual campaigns.
ROI modeling helps you determine how much revenue you generate for every dollar you spend on marketing. If you invest X marketing dollars, then you’ll get X revenue dollars in return.
How to use marketing ROI
Marketing ROI is a critically important metric for several reasons.
First, it allows you to justify the marketing dollars that you spend. If you can show that your marketing efforts are producing a significant ROI, you won’t have trouble convincing company leadership that you should continue spending on marketing (or even ramp it up).
Second, the metric helps you decide where to spend your marketing budget. Calculating the ROI for different marketing programs, channels, vehicles, and campaigns allows you to see what is most profitable. You can then double down on what’s working and reduce the amount you spend on less profitable tactics.
Third, marketing ROI creates accountability. Ultimately, what matters most is not how creative or inspiring a particular marketing campaign is. It doesn’t matter how many “likes” it got or whether it generated buzz. What matters is whether it actually generated revenue for the company. Calculating ROI helps you stay focused on the end goal. It keeps you from pursuing vanity metrics and helps you laser in on what actually makes a difference for your business.
How to calculate marketing ROI
Now let’s talk about marketing ROI measurement because there are several ways to view success.
Identify key performance indicators
To calculate your ROI in marketing, you need to first identify your key performance indicators (KPIs). In other words, you need to determine what metrics you’ll use to measure whether a particular channel or campaign was successful. Not every marketing metric is a KPI, only the most critical ones for tracking and measurement purposes.
The KPIs you choose will depend on the goals of a particular marketing strategy, program, channel, or campaign. If your marketing goals aren’t clear, you won’t be able to effectively measure your marketing performance or make budget allocation decisions.
With that in mind, here are some KPIs you may want to focus on:
Cost per lead
The average cost for you to secure a new lead is your Cost Per Lead, or CPL. Knowing your CPL, combined with the conversion rate of leads to customers, allows you to calculate your Cost Per Acquisition (CPA).
For example, if it costs you $10 per lead and 10% of those leads convert to customers, you’ll have to spend $100 to gain a new customer.
Customer acquisition cost
Cost per acquisition (CPA), or customer acquisition cost (CAC), allows you to determine how much you have to spend to acquire a new customer. You can use it to measure the effectiveness of your marketing efforts in different channels, like PPC, affiliate marketing, social media, etc.
Unlike metrics like click-through rate and conversion rate, which are lead indicators of success, CPA lets you specifically measure the marketing cost, effectiveness, and bottom line impact of marketing activities.
If you know your minimum CPA to achieve profitability, you can double down on the growth marketing activities that are most lucrative.
Customer lifetime value
Customer Lifetime Value (CLV), is the overall dollar amount you can expect to receive from a new customer over the lifetime of their purchases from you. Savvy brands know that you don’t necessarily need a first purchase to be profitable as long as your CLV numbers are high enough. The more important objective is to be profitable over the long term.
Knowing your CLV (sometimes called LTV) allows you to understand how much you can spend to acquire a new customer. If it costs you $1,000 to acquire a new customer and your CLV is $5,000, then your model will be profitable. If, though, it costs you $1,000 to acquire a new customer but your CLV is $1,000, you’re not going to make any money and the business will be unsustainable.
So, if your initial acquisition cost is high, you’ll need to invest in marketing tactics that target existing customers for repeat business. It’s also vital to build loyalty and retention by investing in customer relationship management (CRM). Beyond that, you’ll need to ensure your team actually uses the CRM.
Marketing spend is the dollar cost of your marketing activities. It encompasses online and offline spending across all marketing channels, including print ads for brick and mortar sales and the cost of executing your ecommerce marketing strategies.
You’ll need to track your marketing expenses for each channel as well as individual campaigns in order to properly evaluate the effectiveness of your marketing mix.
Conversion rate is the rate at which your audience is taking a specific action compared to the overall defined audience (e.g., all website visitors). This could be the rate for opting into your mailing list or for completing a transaction on your website, etc.
Your conversion rates will play a major role in your cost per lead and cost per acquisition. The better your conversion rates, the less it will cost you to get new leads and customers.
However, this assumption is not universal. For example, if your costs are outsized to begin with, then even with a high conversion rate you may have an unworkable model. For example, if your Cost Per Lead is $100, and your margin is -$10, then having a high conversion rate simply means you’ll lose money faster. First, make sure the model is profitable. Only then put your foot on the accelerator and invest in conversion rate optimization.
Marketing attribution is the practice of identifying customer touchpoints along the path to conversion, and assigning value. With attribution, the goal is to understand which touchpoints influence your prospect the most, resulting in a sale. In the end, you want an attribution model that accurately distributes credit to your various marketing vehicles along the path to purchase.
For example, although many of your customers may ultimately convert on a PPC ad, it’s possible that SEO and content played a much greater role in driving the sale when you factor the entire funnel of experiences. Armed with this information, you can then strategically invest more in SEO and content.
Attribution models include:
- First-touch attribution
- Last-touch attribution
- Multi-touch attribution
- Weighted multi-source attribution
Brand reputation is the sum of feelings that your customers have about your company. A business with positive brand perception means that customers are more likely to buy your products or services and recommend your company to friends and family. Better brand perception translates into higher LTV and marketing ROI.
Some ways to measure brand perception include Google SERP sentiment, Net Promoter Score, surveys, reviews, focus groups, engagement analytics (dwell time, page views, etc.), social analytics (followers, reach, etc.), and more. Paying attention to brand perception is an important factor in improving your overall marketing results over time. This means standing by your values and doing what’s right as a brand all the time.
Return on investment (ROI)
Ultimately, the most important metric to track is your marketing ROI. This is the KPI that tells you whether your marketing is ultimately successful. The more you can improve your ROI, the more profitable your brand will be.
What is a good marketing ROI?
At the most basic level, a positive marketing ROI means that you’re getting more than a dollar back for every dollar you spend on marketing. The reality, however, is that ROI benchmarks vary depending on both marketing channel and industry.
For example, according to the Google Economic Impact Report, organic search has a big advantage over paid with an average ROI of 5.3X. In comparison, Google estimates that the ROI from PPC is around 2X.
Generally speaking, a good marketing ROI is around 5:1. However, when evaluating your ROI, make sure you’re comparing apples to apples. Compare by industry and channel to evaluate whether your marketing is truly effective. For example, your digital marketing ROI may differ from your offline marketing ROI.
Another way for a brand to create a “good ROI” benchmark (one that is custom to that brand) is to look at the return from similar tactics the brand has tried in the past. The brand can then compare current and future marketing initiatives against that baseline.
Challenges of measuring marketing ROI
Here’s a simple marketing ROI formula:
[(Revenue Generated – Marketing Cost) / Marketing Cost] * 100
So if you spend $5,000 on a campaign that generates $10,000 in revenue, your basic ROI is 100%.
Here’s the problem: it’s almost never this simple.
Why is marketing ROI difficult to measure?
This graphic from TrackMaven reveals the broad range of challenges marketers say they face when trying to prove their value.
One reason marketing efforts are hard to measure is because they’re ongoing. Yet, we calculate ROI over specific periods of time. So, to analyze marketing ROI there needs to be a specific beginning and end date.
Then there’s the challenge of determining what metrics to measure. Do you track gross or net revenue? Do you incorporate LTV into your calculations? How can you calculate exactly how much revenue a particular campaign, channel, or touchpoint is responsible for? What about the impact on brand awareness or audience growth?
There’s also the reality that many campaigns run for months, and it’s difficult to calculate the ROI of a campaign until it’s finished. Leading indicators, such as conversion rate, can be helpful. But, you can’t calculate your ROI without the final numbers.
It’s also extremely difficult to accurately measure marketing ROI without a solid attribution model in place. However, attribution models are rarely bulletproof.
On the surface, marketing ROI seems like a relatively simple calculation. However, the more you get into it, the more complex it can become. Different companies calculate it slightly differently.
For example, HubSpot recommends the following formula for calculating return on marketing investment (ROMI):
[((number of leads x lead-to-customer rate x average sales price) – cost or ad spend) ÷ cost or ad spend] x 100
Ultimately, when calculating ROI on marketing, you have to decide what numbers to include and which metrics are most important for your particular brand.
Best practices to measure marketing ROI
Given the complexities of calculating and tracking marketing ROI, here are some best practices you should follow.
Track the right metrics
First, and most importantly, only track the metrics that actually add value to your business. The number of social media followers you have may make you feel good, but does that actually add anything to your bottom line?
In order to justify your marketing spend, there should be clear lines between dollars spent and value added to your business. It’s one thing to say, “We spent $10,000 and gained thousands of followers.” It’s something else altogether to say, “We spent $10,000 to acquire 500 leads, 50 of which will convert into customers.”
Understand attribution models
Second, understand the different marketing attribution models. This can help you get clearer on how the different marketing touchpoints your customers encounter should be weighted. Marketing attribution software includes C3 Metrics, Adobe Analytics, and Nielsen Marketing Attribution.
Third, collect and analyze as much data as possible for each traditional and digital channel as well as campaigns. Why? Because you won’t know what’s really happening until you see the data in front of you. You won’t be able to compare the ROI of PPC versus SEO unless you can see the number of clicks, leads, and conversions each generates within a given campaign. ROI is a data-driven calculation, so be sure to collect as much data as you can.
Compare apples to apples
Consider measuring ROI in both the short-term and long-term. The reality is that some marketing channels take longer to bear fruit than others. As noted above, SEO is a long-term strategy and often takes time to see significant results. Then, the results start to compound over time, delivering a higher return down the road.
Measuring long-term ROI ensures that you’re not giving up too soon on a particular marketing strategy that may end up being highly profitable.
Factor in all costs
Finally, when calculating ROI, it’s helpful to factor in overhead and variable costs into your calculations, if possible. For example, if you’re running a lead gen campaign on Facebook, you need to take into account not only the advertising costs, but also the cost of your team, agencies, ad creative development, lead magnet creation, landing page launch, etc. This is a more accurate measure of your true ROI.
How to improve marketing ROI
So, how can you improve your marketing ROI? There are a number of strategies you can implement.
Focus on revenue
First, reduce acquisition cost. On the other end of the spectrum, increase Customer Lifetime Value. Both metrics directly affect your ROI. Improving either will boost your marketing ROI. To accomplish either of these things, you must analyze and map the customer journey so that you can identify and optimize each touchpoint.
Test and improve
Second, implement A/B testing to improve your conversion rates. By experimenting with different variations of landing pages, calls-to-action, ad creatives, etc., you can raise conversion rates. This, in turn, helps you identify the messaging and hooks that work best with your target audience. A/B testing also helps you to reduce Cost Per Lead, Cost Per Acquisition, and other factors that lower marketing ROI.
Think long-term value
Third, invest in strategies that have a higher long-term ROI, like SEO, content marketing, and email marketing. It’s true that these strategies require more work up front and take longer to generate results, but in the long run the payoff is much higher. Plus, the results compound over time, further increasing your marketing ROI.
If you’re over dependent on paid advertising, your ROI may appear to be sufficient initially, but will suffer longer term.
Fourth, pay attention to leading indicators that affect content marketing ROI. Even though you can’t really calculate ROI until a campaign (or designated time period) is over, you can pay attention to leading indicators that are related to ROI.
For example, if a landing page has a high bounce rate and low time on page, it indicates that the content of the page isn’t very useful to visitors. This translates into low conversion rates and high acquisition costs. If you see this happening, you can attempt to optimize the page for a better ROI.
Wrap up: measuring, calculating, and using marketing ROI
Marketing ROI analysis is critical for evaluating the effectiveness of marketing campaigns and channels. It enables you to get clarity on what’s working, where you need improvement, and what strategies you should be pursuing more aggressively.
And while the ROI calculation can be complex, it’s essential for marketers. If you don’t, you’ll have a hard time justifying marketing spend and may end up pursuing vanity metrics that don’t actually move your business forward.
Base your marketing decisions on the data. Track and measure long-term ROI, and keep doubling down on what’s working most effectively so that you continually improve your marketing ROI and achieve significant organic growth.
Marketing ROI FAQ
Marketing ROI is defined as the return on investment from all of your marketing efforts. It’s the difference between the cost of your work and the profits you earn.
Generally speaking, a good marketing ROI is around 5:1. However, this value might change significantly depending upon how you calculate it.