Proving the value of marketing campaigns can be difficult, especially at the earlier stages of the marketing funnel where conversions and KPIs aren’t directly linked to sales or revenue.
This makes it difficult to put a monetary value on strategies like content marketing or individual ad campaigns that might be essential for generating leads but don’t close the deal themselves.
Accurately calculating the return on investment (ROI) of every marketing action is crucial for proving that they contribute to generating revenue – whether it’s directly or further down the consumer journey. Not only do business executives expect you to show the value of your marketing efforts in plain numbers, you also need to know yourself which strategies are profitable.
In this article, we explain how you can calculate marketing ROI more effectively, why it’s so important to do so and some of the difficulties/limitations you might experience along the way.
What are we looking at in this article?
Our priority with this article is to help you accurately calculate the ROI of your marketing campaigns. Aside from proving the value of successful marketing actions, this will also enable you to identify areas for improvement and optimise your campaigns to improve performance.
That being said, it’s important to understand that ROI isn’t the perfect KPI – a trap many marketers and business owners fall into. In marketing, there is no one metric to rule them all and ROI should be used alongside other performance indicators to build a complete picture of campaign performance – something we’ll explain in more detail throughout this article.
Here’s a preview of what we’re looking at:
- Marketing ROI definition
- Free marketing ROI calculator
- Why is ROI so important?
- The pros and cons of ROI
- Is ROI overrated?
- Other important metrics and KPIs
Once we’re done, you should have everything you need to calculate the ROI of your marketing campaigns and a better understanding of how to use (and not use) return on investment as a marketing KPI.
Marketing ROI: The obligatory definition
In articles like this, it’s always best practice to start by defining the subject to make sure everyone’s on the same page. So what exactly is marketing ROI? Well, return on investment (ROI) aims to tell you how much revenue you’re getting in exchange for your total marketing spend.
In other words, ROI measures the difference between how much you spend on marketing activities and how much money they generate.
ROI is measured as a percentage and there are numerous ways to calculate it – several of which we’ll be looking at in this article. The most basic method of calculating ROI is to subtract your marketing spend from the revenue generated, divide this figure by your marketing spend and then times the resulting figure by 100.
So your basic ROI calculation formula would look something like this:
ROI = Marketing revenue – marketing spend / marketing spend x 100
Let’s say one of your marketing campaigns has generated $100,000 revenue over the past financial year and the total marketing spend on that campaign comes to $38,000.
Your marketing ROI calculation would be as follows:
100,000 – 38,000 = 62,000
62,000 / 38,000 = 1.63*
1.63* x 100 = 163%
* Figures rounded to the nearest hundredth decimal
So that’s the basic formula of calculating return on investment but, in reality, accurately calculating marketing ROI is a little more complex than that – something we’ll explain in more detail throughout the remainder of this article.
First, though, let’s take a look at our ROI calculator.
Marketing ROI calculator
To help you calculate the marketing ROI of different strategies, we’ve built an ROI calculator, powered by TrueNorth.io and built using Leadformly. You can even embed this form on your own website by filling it out and clicking on the embed link on the final results page.
To calculate your marketing ROI, simply follow the steps on the form above, starting with how much you have spent on any given campaign or strategy – e.g.: $10,000.
Click on the continue button and the next step will ask you to provide the following three details:
- Conversions: How many conversions you generated from your investment.
- Conversion goal: Which type of conversion goal you’re measuring (sales, sign-ups, leads or visits).
- Return: The total revenue you generated from these conversions.
This stage is important because it forces you to attribute revenue to your conversions goals. For example, if you’re calculating the ROI of a lead generation strategy, you need to understand the average value of every single lead – not only the ones that lead to purchases.
Let’s say you spend $10,000 on a campaign that generates 3,000 leads – fairly realistic numbers, albeit conveniently round. You can already take from this that you’re spending an average of $3.33 on every lead from this campaign, which is a crucial metric for understanding the value of marketing strategies before the sale.
Now, all you need to do is attribute the total revenue generated by this campaign. Let’s go with a modest 1% success rate of turning leads into customers and say you get an average of $3,000 from each customer. This gives you a total return of $90,000 for this campaign and you’re ready to calculate your marketing ROI.
Complete the form and your results reveal a campaign ROI of 800% and a return of $30 for every lead (vs $3.33 spent).
By calculating ROI in this manner you can also identify room for improvement. Of course, you could increase investment and expect to generate even more revenue from such a profitable campaign.
Alternatively, you could look at that 1% conversion rate of leads into customers and decide there’s room for improvement here. By optimising your lead nurturing strategies and turning more of them into paying customers, you can increase revenue without increasing your investment.
Another angle to take could be increasing the lifetime value of each customer. So, instead of generating an average of $3,000 per customer, you could incorporate cross-selling and upselling campaigns with the aim of increasing this to an average of $4,000, which would get you up to $120,000 revenue from $90,000.
The point is: the more detailed your ROI calculation is, the more accurate it becomes and the greater insights you have for improving performance across your campaigns at every stage of the customer journey.
Why is ROI so important?
Needless to say, ROI is one of the most important KPIs for marketers and businesses. There’s no such thing as a free marketing strategy and, above all, you need to know that you’re generating enough revenue to justify the expense across your marketing activities.
More specifically, there are several reasons why ROI is so important to marketers, specifically.
Prove your marketing strategy is profitable (or not)
Return on investment is by no means the only measure of marketing success and not a perfect KPI, either. We’ll look at the pros and cons of ROI as a metric later but, for now, let’s give it the credit it deserves as one of the most important and useful measures of marketing success.
The first reason ROI is such an important metric is that it helps establish that marketing campaigns are profitable. If you’re investing $38,000 per year in marketing and generating $100,000, then you’ve got yourself a profitable marketing strategy.
Calculate growth potential
The second reason ROI is so important is that it also helps you calculate growth potential. If your marketing strategies achieve an ROI of 163% and generate $100,000 revenue from $38,000 investment, then, in theory, you should be able to double your revenue and profit by doubling the investment.
Of course, things aren’t always as simple as this but ROI gives you a strong indication of growth potential and allows you to pinpoint specific marketing strategies that are worth increasing your investment.
Let’s say your SEO strategy currently has an ROI of 123% while your paid advertising strategy has a more profitable ROI of 238%. This gives you a strong indication that increasing your PPC budget is the most profitable step to take with next year’s marketing spend.
Protect your marketing budget
Return on investment is also a valuable measure of failure and accurately pinpointing marketing strategies with underperforming or negative ROIs can save your marketing budget – or even your entire business.
A poor ROI doesn’t necessarily mean you need to pause your strategy or abandon it altogether, though. Once you pinpoint underperforming strategies or campaigns, you can optimise them to improve performance and increase the overall ROI of your collective marketing strategies.
It works both ways, too. You can learn lessons from your high-performing strategies/campaigns and apply these to improve the results of less successful ones.
Attribute failure & success
Above all, ROI allows you to prove where the success and failures are in your marketing efforts. Whether you need to prove results to directors, identify successful strategies or optimise individual campaigns, ROI provides a simple, accountable measure of success.
You can use this to test new strategies, demonstrate your successes, identify failures and learn crucial lessons along the way.
This doesn’t mean ROI is the perfect measure of success or the only one you need. As with all marketing metrics, there are pros and cons to using ROI as your primary KPI and it’s important to understand these.
The pros and cons of ROI
As a ratio of revenue vs spend, return on investment is a great way to measure the effectiveness of your marketing campaigns. However, a lot of marketers fall into the trap of prioritising ROI when there are plenty of other important metrics that should be considered alongside it.
All KPIs have their limitations and weaknesses, which is fine – as long as you know what they are. Return on investment is no different and understanding the pros and cons of ROI will help you use it effectively.
The pros of ROI
ROI is easy to understand
One of the biggest strengths ROI has as a KPI is that it’s easy to understand from a reporting perspective. If your campaign has an ROI of 163%, then you know it’s generating profit and adding value to your business.
Likewise, any campaigns with an ROI lower than, say, 50% are hurting your marketing budget. From this single metric, you can see which campaigns are working for you and which ones need optimising to improve performance – or dropping altogether.
The easy-to-understand aspect of ROI is valuable for demonstrating the effectiveness of campaigns to non-marketers, too. If you’re sending reports to executives who want to know your marketing efforts are paying, ROI is going to be one of the first KPIs they look out for.
Talking to non-marketers about impression shares, customer lifetime value and retention rates doesn’t always communicate the value of strategies in a way they’re interested in. Return on investment is a fast, no-nonsense measurement to demonstrate all of the good things you’re doing.
Fast & easy comparisons
ROI’s no-nonsense nature is great for marketers, too – especially when you need a fast and easy way to compare the effectiveness of different strategies or campaigns.
If your aim is to increase revenue for the next year, you can use ROI to see which strategies will achieve the highest income through increasing investment.
On the other hand, if your aim is to increase revenue without investing anymore, then you can optimise the strategies with the lowest ROIs to improve performance, increase ROI and generate more revenue from the same marketing spend.
Achieving either of these goals is easier said than done, of course, but ROI makes it easy to compare performance through a single metric and help you prioritise where your marketing efforts (and budget) are best spent.
Universal and divisible
Another big strength of return on investment as a measure of performance is that you can apply it to any marketing strategy and calculate it for every campaign. You can use ROI to measure the performance of all your marketing efforts, each individual strategy, every platform being used and specific campaigns.
While some metrics and KPIs are only useful for certain campaign types, ROI is universal and divisible across every level of your marketing activity.
The cons of ROI
ROI is difficult to calculate
The biggest problem with marketing ROI is that it’s difficult to calculate accurately. As mentioned earlier, there are so many variables involved in marketing that ROI can be an elusive metric.
The biggest challenge of measuring marketing ROI is attribution.
How do you prove the value of every individual blog post, ad view, email campaign and lead generation strategy? If you can attribute all of these touchpoints to the sales they lead to, then you can calculate ROI with some sort of accuracy.
Unfortunately, this is impossible to do with 100% accuracy. Tracking codes aren’t infallible and there are certain interactions hold value but you simply can’t measure – for example, ad impressions that build brand awareness but don’t convince users to click the first time they see them.
It’s an unreliable prediction model
Another problem with return on investment as a marketing metric is that it’s unreliable as a prediction model. The point is, ROI was never designed to be used for prediction models and it’s not suitable for this purpose.
A lot of marketers make the mistake of calculating ROI and thinking they’ll get linear results by simply increasing spend.
ROI is a measurement of return vs spend at the time of calculation, not a prediction. So doubling your investment doesn’t necessarily double your return. In fact, ROI is rarely linear and one reason for this is the law of diminishing returns, which describes a point where increasing investment results in a disproportionate increase in revenue.
Another reason is that there are so many variables that can skew the reliability of ROI as a single metric – the weather, time of day, current political events, economic stability, the weekend’s sporting results and an infinite number of factors that have nothing to do with marketing.
You can partially overcome this problem by tracking ROI over time and then use this data to forecast future returns. This makes ROI a significantly more reliable measurement of performance but it’s important to understand that this isn’t what ROI is designed for.
ROI can catch you out
The simplicity of ROI as a performance metric catches a lot of marketers and business owners out. If you don’t know how to use it properly – or rely on it too heavily – ROI as a marketing KPI can lead you astray and encourage you to make some poor decisions.
Earlier, we talked about the law of diminishing returns and failing to understand this principle can be costly – especially if you hike up your spend on a campaign only to see unimpressive results.
Another common problem with misusing ROI is that marketers might pause campaigns that aren’t generating revenue, even though they’re adding crucial value. For example, you might pause a social media campaign that isn’t generating sales without realising those ads are building brand awareness and increasing the number of people who search for your business on Google or pick up the phone and call you directly.
Once you cut off this supply of leads, you start selling less through the other campaigns it supports.
This is why attribution is so important in calculating the true ROI of campaigns.
Is ROI overrated?
Return on investment isn’t overrated but it is often misunderstood and misused by marketers. ROI was never designed for the complex world of digital marketing and it’s unrealistic to expect any single metric to accurately measure the performance of your campaigns.
ROI is useful for gauging the efficiency of your marketing efforts but you have to understand its limitations. Another problem you’ll experience is not having the necessary tools to calculate ROI with 100% accuracy, especially for campaigns that don’t directly generate revenue.
No matter how good your data processes are, you’re not going to attribute every click to the final purchase.
So ROI isn’t an absolute figure for profitability or efficiency of your marketing actions, it’s more of a rough guide. That being said, you can increase the accuracy and usefulness of ROI as a metric by calculating it in greater detail and attributing every datapoint possible.
This is why our ROI calculator asks you how many conversions your campaign generates and which type of conversion you’re measuring the value of.
Other metrics & KPIs to measure
One of the biggest mistakes marketers make with using ROI as a KPI is they put it to the top of their priority list and develop tunnel vision. Optimising for maximum ROI isn’t a viable marketing objective and it takes your attention away from what really matters most: profit.
Return on investment can help you estimate the profitability of your marketing campaigns but it’s not the end goal. Instead, ROI should be used along other crucial performance indicators to build a rounded picture of your marketing profitability.
- Profit: Generally there are three levels of calculating profit: gross profit, operating profit and net profit – each with different uses.
- Profit margin: Each level of profit calculation has a subsequent profit margin calculation – gross profit margin, operating profit margin and net profit margin.
- Operating expenses: How much it costs to run your marketing strategies.
- Market share: Your revenue as a percentage of the total revenue generated within your niche.
- Growth rate: A timeline of revenue over monthly, quarterly and annual periods.
- Cost per acquisition: The average amount you spend to convert each customer.
- Customer lifetime value: The ongoing value of each customer to your business.
- Customer retention: The percentage of customers who continue to buy from you.
- Churn rate: The percentage of customers that stop buying from you over a defined period.
The list goes on but the key point is that ROI alone can’t give you a reliable calculation of marketing or business performance. For example, it doesn’t matter how great the calculated ROI of a campaign is if you don’t have the available budget required to achieve your target return.
By surrounding ROI with other important KPIs, you can build a more accurate picture of marketing (and business) performance. This, in turn, leads to more accurate predictions and informed marketing decisions at every stage of the consumer journey.
Prove the value of your marketing campaigns
Return on investment is one of the most important KPIs for marketers, but also one of the most elusive. Accurately calculating marketing ROI can be tricky and knowing how to use it properly is more complex than it appears.
However, taking the time to build accurate calculations of ROI allows you to prove the value of marketing strategies at every level – from every blog post and ad impression to the “last touch” actions that clinch the sale.
And the more granular you get with your ROI calculations, the more opportunities you’ll discover for optimising to improve results while having the necessary insights to measure performance.