The term marketing ROI is used to refer to the return on investment (ROI) that is received from one’s marketing strategies. The calculation of Marketing Roi is important to gauge the value and returns generated by the marketing initiatives planned by the business. It is basically that the final amount of the money that is obtained after subtracting the initial investments.
Understanding The Concept Of The Marketing ROI
In general, the marketing ROI is the ROI that is received depending upon the marketing strategies used by a company or any business entity. It can be used as a barometer to measure the performance of the marketing tactics that the company uses.
With the help of the marketing ROI, it becomes easy to determine the success of the effort that is put by a company to improve their businesses methodologies.
The marketing ROI is a representation of the overall gain whether it relates to the gaining leads, or the driving sales or the increase in the engagement of the customers or the tactics which is driven by the growth.
By looking at the stats, it was found that there are so many businesses in the world out which there are 40% of those, who think that providing a marketing ROI is one of their top marketing challenges.
Determining the marketing ROI is also important because it helps them in understanding where all of the money is being spent, and thus they can slow down their expenditure rates by working on those specific areas.
Now often people confuse the term return on investment (ROI) with the marketing return on investment (marketing ROI). This is because the ROI can be calculated in any field, but the marketing ROI is calculated in terms of marketing only.
In the case of the marketing ROI, the money here is not tied up to the plants and inventories. Instead, it is risked in the marketing funds.
The marketing ROI is normally tracked in overhead in the ‘Sales and General expenses.’ But there are a few companies and other business entities that deduct these from the ROI calculation. This way, one gets to have a closer estimate of the true profit that is being generated by their marketing campaigns in favour of the company.
What are the various measures that are taken into consideration to Calculation of Marketing ROI?
One of the most important things to do when it comes to calculating the marketing ROI is that one needs to determine what are the various factors that together constitute your return.
Also, one needs to find out the ‘true investment’ for that particular company for which the marketing ROI is being calculated.
Now to understand this in a more simplified way, let us consider an example in which the different marketers may consider the following factors for the return-
1) Total revenue
This is something which is granted for either the campaign or the gross receipts. In some cases, it is even granted for the turnovers. It all depends on the type of organization that it is for which the marketing ROI is being calculated and also the location of that particular organization.
This simply relates to that top line of sale which is generated from a particular campaign.
2) Gross profit
The gross profit is also known as the gross profit estimate. This can be determined by subtracting the cost of goods forms the revenue. Here the cost of goods refers to those goods that are either produced or delivered in terms of the products or the services.
In certain cases, there are companies which use another method for the determination of the gross profit. They basically use the cost of goods percentage of the company and then subtract it from the total revenue of it.
3) Net profit
Now the net profit is basically the value that is obtained which is nothing but the gross profit subtracting all the expenses. Now if we take a look on the investment side, it has been found that the marketers generally input the value of the media cost as the investment.
But it does not end here. There are several other costs too that should be included.
Now for the efficient execution of the campaign, it is necessary not to forget the other costs as well, which together may help in determining the marketing ROI. For this, the various other costs are like the printing cost, the technical cost, the creative cost, the cost of sales, etc.
Also, many people tend to eliminate the time factor from this. But it would be a big mistake. Time factor too should be included in this which may be due to the investment of time by being indulged with the email platforms, time that was required for the website coding, etc.
What is the need for the Calculation of Marketing ROI?
Calculating the marketing ROI is not an easy task, but it still is a necessity. Thus all those companies who are serious about their business prefer to calculate the marketing ROI. The reason why calculating marketing ROI is so important is that it is quite helpful in justifying marketing investments.
Now whenever the market is dealing with tough times, then many of the companies tend to slash off their marketing budgets. This is not considered to be the best idea provided the fact that marketing is just an investment which is made in order to produce revenue.
So if there will be an ROI on which the companies will be focusing, then in such cases it helps the company to deviate from the idea that marketing comes with a lot of expenses that they can cut down when the company is facing a hard time.
Now the different organization can use different components for calculating the ROI. Also, if the ROI is calculated in the right manner, it becomes quite easy to focus only on those campaigns which deliver the greatest returns.
How to Calculation of Marketing ROI?
The calculation of the marketing ROI totally varies from one company to another. An organization to free to choose from the components to calculate their marketing ROI. Now while calculating these two primary methods are used.
The first one of them is ‘the cost to do something’ and the second one is the ‘outcomes that are generated as a result.’ Here one thing that should be kept in mind is that it is usually measured in terms of the profit, but here it the revenue has been used.
The formula that is used for calculating the marketing ROI is –
Marketing ROI (%) = [(Revenue return – Marketing spend) / Marketing spend] * 100.
An example of how to calculate the marketing ROI?
Now the formula that is used for the calculation of the marketing ROI is given as-
Marketing ROI (%) = [(Revenue return – Marketing spend) / Marketing spend] * 100.
Now suppose that there is a person named John who spent $ 6000 on Twitter ads and was able to generate $12,000 in terms of revenue from these ads. Then the marketing ROI here will be calculated as-
Marketing ROI (%) = [($12,000 – $6,000) / $6,000] * 100
Marketing ROI (%) = 100%
This means that with the help of this campaign, John was able to receive a 100% return on investment.
Now the value of the marketing ROI can also be negative. Let us consider an example for that-
Suppose that John, this time spend $6000 on Twitter to generate ads. But this time he could only generate $3000 as revenue. So the calculation here would go as-
Marketing ROI (%) = [($3000 – $6,000) / $3,000] * 100
Marketing ROI (%) = -100%
Now here, it can be clearly seen that the final value of the marketing ROI has come a negative. This negative percentage value means that the return was also negative.
Thus either the strategy has to be changed, or one needs to work on their ads creativity and the various parameters of the ad
Thus one must keep working on their marketing strategies until the value of the ROI starts coming in positive.
Also, one important tip is that instead of just deducting the value of the marketing spend forming the revenue generated, try to use the percentage value instead.
This makes it easier to be able to compare the returns that get on the various strategies, even if the numbers differ from each other a lot.
What are the challenges that come while calculating the marketing ROI?
- The calculation is very tricky, and complex algorithms and formulas are used.
- When the ROI is calculated manually, it becomes time-consuming.
- It requires a lot of patience because it takes several months to finally be able to know whether the campaign was profitable or not.
Thus calculating the marketing ROI is surely a complicated process.
But once it is determined, it becomes a boon for the companies to find out whether their marketing strategies are working in the right direction or not.