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What is Return on Investment?
Return on Investment (ROI) is a metric used by marketers to evaluate the performance of a campaign in terms of its overall profitability and impact on business success.
When a marketing campaign generates more revenue than it costs to implement, the campaign is said to have yielded a positive ROI. When a marketing campaign is more costly to implement than the amount of revenue it produces, we would describe that campaign as having a negative ROI.
Measuring ROI allows businesses to understand which marketing strategies do the best job of growing revenue, adjust their campaigns to increase profits, and justify ongoing spending and investment in marketing.
Why is Return on Investment Important?
Return on Investment is one of the most important metrics that marketing teams track in the course of executing their campaigns. Here’s why:
- Quantifying Marketing Results – Marketing should be results-driven. When business leaders invest organizational resources in marketing, they want to know how much is being spent and how much they’ll be getting back. Measuring ROI allows marketing teams to measure the results of their campaigns in concrete and numerical terms and show whether their efforts are making money or losing money for the business.
- Evaluating Marketing Tactics – Marketers can compare ROI metrics between campaigns or projects to determine which marketing campaign generates the strongest return on investment. In this way, measuring ROI empowers marketers to strategically invest their budgets in campaigns and promotions that provide the best returns.
- Ensuring Business Viability – A company that spends $10,000 on marketing to generate $1,000 in revenue won’t last long without hefty financial backing, while a company that spends $1,000 to generate $10,000 in revenue is very much on the path to profitability. When marketing ROI is positive, businesses can generate new customers and grow by continuing to invest in marketing. When marketing ROI is negative, businesses must adjust their revenue models or secure additional funding while working toward a more profitable marketing strategy.
How to Calculate Return on Investment
To calculate the ROI of a campaign or project, marketers need to quantify two things:
- Marketing Cost – What was the overall cost of planning and executing the marketing campaign? How much was invested?
- Marketing Return – How much of a return did the marketing campaign generate? What was the net profit?
Here’s an example:
Company A decides to invest in a three-month content marketing strategy.
The marketing manager at Company A hires external consultants to work on the content strategy, a third-party writer to create the content, and a PR firm to help distribute the content to target audiences.
Pursuant to this campaign, Company A spends $3,000 on the consultants, $3,000 on the writer, and $3,000 on the PR firm for a total cost of $9,000.
By tracking conversions on their website, Company A finds that customer engagements with their newly created content resulted in 20 new software purchases with an average customer lifetime value (CLV) of $2,800 – that’s $56,000 in total revenue.
Company A can calculate the ROI of this marketing campaign as:
=> [Net Profit] / [Total Invested] x 100% = ROI
=> [(20) x ($2,800)] / [($3,000) + ($3,000) + ($3,000)] x 100% = 622%
=> [$56,000] / [$9,000] x 100% = 622%
The ROI calculation shows that Company A’s content strategy is quite profitable, generating $6.22 in revenue for each dollar of marketing spend.
For SaaS companies, marketing ROI can be measured in terms of customer lifetime value (LTV) and customer acquisition cost (CAC). If LTV is $3,000 and CAC is $1,000, acquiring that customer resulted in a 300% ROI and a net profit of $2,000.
3 Challenges When Measuring Marketing ROI
Calculating return on investment for a marketing campaign can be a straightforward process, but marketers do sometimes face challenges when working to develop accurate ROI measurements. Below, we highlight three of those challenges and how they impact ROI measurements.
Accurate and Complete Cost Accounting
To get an accurate measurement of ROI, marketing teams need to account for the full cost of their marketing activities, including both financial and human resources.
The ROI for a given campaign could look very strong if only financial resources are counted in the cost, but counting human resources in addition to financial resources can paint a different picture. Marketers should try to include all costs related to the marketing campaign in their ROI calculations to produce the most accurate results.
Attributing Revenue to Specific Marketing Activities
Marketing attribution is another challenge that marketers run into when doing their ROI calculations.
When an organization is running five or ten marketing campaigns across multiple channels, it becomes more difficult to attribute new sales and revenue to the campaign(s) that produced it.
Marketers may address this challenge by attributing sales to the most recent marketing touchpoint, or by leveraging marketing software with complex attribution modeling to understand which marketing campaigns, touchpoints, or assets are best correlated with sales outcomes.
At Directive, we use a system called closed-loop marketing that leverages automation and business intelligence to help us track customers through every interaction with our campaigns and accurately attribute revenue.
Valuing Short-Term vs Long-Term Marketing Results
When an organization spends money on marketing, not all of the returns are realized immediately.
In some cases, new sales and revenue growth can be attributed directly to recent marketing spend – that’s great! But in other cases, marketing creates brand awareness in the target market that impacts their future purchasing behavior but does not immediately translate into hard sales.
Marketing can also have other impacts, such as increasing customer retention, that are not immediately obvious or calculable but have clear long-term benefits and revenue implications.
What is a Good Return on Investment for Marketing?
A good return on investment for marketing ensures that your business can grow its customer base consistently and profitably into the future.
Any negative ROI is not good – it means your campaigns are losing money and it’s time to make some major adjustments.
An ROI of 0% means that you earned just enough revenue to cover your marketing costs – you’re back where you started. You may have increased brand awareness in the marketplace or impacted future customer behaviors, but financially you’re no better off than before.
Even an ROI of 200% can be considered low for companies that have high overhead, production, and distribution costs.
A good ROI for marketers to aim for is 300%. A marketing ROI of 300% means that the lifetime value of an average customer is worth three times more than the cost of acquiring that customer.