Marketing ROI refers to the return on investment you receive for your advertising and marketing campaigns. This simple formula can yield powerful insights for data-driven campaign efforts.
Develop a Campaign Strategy and Goals
The first step when calculating ROI is to establish a campaign strategy and goals. Once you determine an objective, you can create a target for yourself and figure out what you need to be able to reach that target. From there, you can calculate the necessary marketing investment.
Certain campaigns can be difficult to quantify. ROI is typically calculated off of fixed costs, such as the cost of printing and postage in direct mail or the cost of a digital advertising budget, compared to the sales achieved. If you're running multiple campaigns across different channels, you should calculate the ROI by marketing channel. ROI is calculated as a percentage, which makes it easier to compare "apples to apples" across channels when costs and results vary. The time and frequency at which you should evaluate your advertising strategy should depend on the specific goals you set beforehand.
Calculate the Marketing ROI
In order to calculate the marketing ROI, you have to add up the costs for the campaign in question. Costs may include the actual cost of placing an ad, printing a postcard or sponsoring air time on television and radio. They may also include creative fees, such as the cost of hiring a writer or a graphic designer to work on the campaign.
After adding up the costs, you'll also need to add up all the sales that are directly attributable to the advertisement. This process can be tricky if you haven't taken the steps, outlined below, to track your campaign accurately.
Once you determine the costs and expenses, you should use this formula to calculate ROI:
Return (Gross Profit) - Investment (Campaign Costs) / Campaign Costs x 100.
Subtract the campaign costs from the gross profit, and then divide that number by the campaign costs. Next, multiply the result by 100 to obtain a percentage. Marketing ROI is typically expressed in this format.
Obtain Clear Metrics: Direct Response Methods
In direct response marketing, calculating the ROI of any campaign is a basic method for assessing its success rate. To obtain clean data for such a calculation, direct marketers rely on specific tracking methods so that they can attribute sales to individual advertising campaigns.
1. Direct Mail
With a direct mail campaign, you can use a tracking code on the order form or a special coupon code to track sales back to a specific mailing. For example, a catalog company may offer free shipping for customers who provide a coupon code printed on the mailing label. If and when customers place an order (whether by phone, mail or online), they will be prompted for the coupon code. By tracking orders tagged with the coupon code, the company can track specific sales back to the print catalog rather than to other campaigns.
Phone orders can also be tracked based on the unique telephone numbers that are used in a campaign. Many television commercials use this method so that the advertiser can attribute orders to a specific television ad, station or time when the commercial was run. The phone number is typically posted on the screen in the last frame, making it easy for the videographer to swap it out and create duplicate ads with different response numbers. You'll need to set up different phone numbers to track such a campaign, but the resulting data may be worth the investment.
3. Digital Campaigns
Digital campaigns can be tracked based on click-throughs, landing pages, keywords used, source codes and other similar methods.
4. Print Advertisements
Similar to a direct mail campaign, coupon or special offer, print campaigns can include codes that will help you track results back to a specific advertisement. For example, a dental office may offer a free checkup to readers of a specific newspaper who respond to their print ad. If they only give this offer out in one newspaper, they can know for sure that anyone who requests the free cleaning saw the ad in that specific newspaper, and this exchange can be counted toward the marketing ROI for that particular advertisement.
What Is a Good ROI?
The question most business owners ask is, "What's a good ROI?" The answer is: It depends on your goals. According to WebStrategies, a typical benchmark used by marketers is a 5:1 ratio, which is considered average.
However, if your past campaigns fared better, then you'll aim higher, perhaps for a 6 or 8 times return on your investment. If you're new to marketing, you may want to simply achieve a return on investment plus a modest profit. Each business has to set its own ROI goals from the start, but most companies usually aim to break even as the absolute minimum.
A smart business tracks its marketing ROI to ensure that it's not spending more than it's recouping on marketing costs. By tracking ROI over time, using direct marketing methods to track sales by campaign and focusing on your goals, you can get the most from all of your marketing efforts.
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