Return on Investment (ROI) in Marketing? A Guide to Calculating Digital Marketing ROI

When it comes to justifying the expense of digital marketing, far too many businesses rely on anecdotal evidence or gut feelings. The truth is that calculating the ROI of your digital marketing efforts is a relatively straightforward process, provided you have the necessary data.

Marketing is often seen as a necessary cost of doing business, but what if there was a way to measure and calculate the return on investment (ROI) of marketing initiatives? Turns out, there is–and it’s not as difficult as you might think. But if you need help with reviewing your Marketing ROI, Agency 310 has your back!

What is ROI?

ROI is a well-established metric used in banking and finance to measure the profitability of an investment.

Businesses use marketing ROI to determine whether their marketing spending was effective. For example, a company may decide to use billboards to promote its products, but if those efforts do not result in increased sales, then the ROI of marketing should be recouped by reducing advertising expenditures on other channels (perhaps print or television).

What is Digital Marketing ROI?

“Digital marketing ROI” essentially uses the same method as traditional ROI to measure the profitability of digital marketing initiatives. From your website to your social media channels, all of the tactics used in digital marketing are worth measuring. A zero return on investment (or near-zero) is unlikely, but instead, you should expect “good” returns on investment.

How Marketing ROI is Used by Companies

Not every business needs to calculate marketing ROI. But if you do, here’s what it can do for your business:

  • Help you understand and justify the effectiveness of your digital marketing activities, with supporting data.
  • Determine if you are spending your budget wisely on Google ads, social media campaigns, content marketing initiatives, and more.
  • Determine what channels are paying off and which ones need to be reworked.
  • Determine what tactics are not working, and eliminate or improve them.
  • Determine if your marketing activities are being effective at bringing in new qualified leads and sales.

Need help with calculation your marketing ROI? Let’s review your ROI together.

Here are four key ways of using Marketing ROI:

Justifying Marketing Spend

Marketing ROI allows you to quantify how much return on investment (ROI) your digital marketing activities will produce. It is a great way to prove that your company’s budget is being used wisely, and in the correct amount of channels.

Distributing Marketing Budgets

When you know what the ROI of a marketing tactic is, you can allocate more money to those tactics that have proven more effective. You can also determine if your social media investment is producing results. If not, maybe it’s time to reassess your current approach. On the other hand, if it’s working, social media may deserve a bigger share of your marketing budget.

Establishing Baselines and Measuring Campaign Success

ROI is a great starting point for measuring the effectiveness of digital marketing campaigns. You might find that certain channels are generating more leads and sales than you originally thought. This means those channels are worth investing in more, or possibly cutting down on traffic used to promote your company’s content.

Measuring the effectiveness of your marketing efforts helps you determine what is working and what isn’t. This can help you determine whether your budget is being efficiently allocated.

Competitive Analysis

Comparing your company’s marketing ROI to other companies in the same industry is a great way to gauge your progress. You can also see how your marketing ROI compares to a competitor’s. If they are achieving better results than you, then you know where you need to improve.

How to Calculate Marketing ROI

There are different ways of calculating marketing ROI, and the key formula for understanding high-level marketing impact is relatively straightforward:

Marketing ROI = (Sales Growth- Cost of Marketing) / Cost of Marketing

However, it’s worth noting that the value of sales growth depends on marketing efforts. As such, you should account for organic sales to generate a  realistic overview of marketing ROI and impact.

Marketing ROI =(Sales Growth – Marketing Cost – Organic Sales Growth) / Marketing Cost

You can use this calculated ROI to make decisions about the type of marketing campaigns and channels you should invest in. However, you should also include your website, email marketing and other areas to make sure all of your marketing efforts are being evaluated.

Example of Marketing ROI

Let’s say that a company wants to promote its new product line in a specific industry. They spend $20,000 on in-person advertising campaigns, $10,000 on radio advertisements and $17,000 on online advertising (over the course of three months).

During this time, the company sees the following results:

  • Sales from in-person campaigns increased by $6,000 each month.
  • Sales from radio advertisements increased by $1,000 each month.
  • Sales from online advertising increased by $10,000 each month.
  • The company’s sales growth without any marketing efforts is 3% per month. In that case, the organic sales would be 12% over three months or 36%.
  • Calculated Marketing ROI is 12.36%.

The ROI and Impact Ratio of your marketing campaigns can also be calculated based on your monthly conversions, which are the number of leads that convert into sales per month, multiplied by the average cost of converting a lead.

With this formula you can create a graph that demonstrates the results of marketing efforts. This could be helpful if you’re in charge of marketing initiatives and have to justify spend to others within the company or management, who may not see the benefits yet.

Don’t struggle with leveraging and calculations, Let’s review your ROI together!

Key Elements  to Factor Into Calculations of Marketing ROI

When considering your company’s marketing ROI, there are a number of key factors you should take into account. Each of these elements is important to help you gain insight and make positive decisions about where your marketing budget should go:

  • Total Revenue: The more sales you generate, the higher your return will be. The more sales you generate, the higher your return will be. Conversion Rate: Sales growth may increase as much as three times when a conversion rate improves by 10%. Therefore, if you have a low conversion rate, it will hurt your ROI calculation as much or more than if you had better marketing campaigns.
  • Net Profit: The more revenue you generate, the better. However, it’s also important to take into account your profit margin. For example, if you have a small net profit but increase your sales by 50%, it will have a greater ROI than if you have a higher net profit but only increase sales by 25%.
  • Gross Profit: The number of products or services sold and the price per unit should be taken into account. This can help you understand whether improving your gross profit will have a greater effect than increasing revenue but decreasing profit margins.
  • Time: The longer it takes your company to generate new customers, the lower its ROI will be. This makes sense, as it’s difficult to justify certain marketing tactics if it takes them a long time to pay off. For example, it would take an ecommerce business a lot longer to generate sales from PPC (pay per click) ads compared to a B2B company that generates revenue by selling its product catalog directly to businesses.

What Does a Good Marketing ROI Entail?

You can’t just look at one metric and think you have a good return on investment. Businesses need to use a number of factors to properly evaluate the marketing that they are investing in.

In order to have a successful marketing campaign, the company needs to have solid goals. You can’t just throw money at marketing and hope for the best. You need to determine the outcomes that you hope to achieve from your marketing activities, and then compare them to the results you are currently achieving. Need help with evaluating the results of your marketing campaign? Well, contact us today for a free consultation and we’ll review your ROI together.

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