The science of marketing ROI

Measuring marketing returns is not an exact science, but it’s getting much better. The biggest questions companies have about their marketing campaigns is what return on investment (ROI) they are getting for the money they spend. Let’s look at a few different ways this question is answered.

Simple ROI
The most basic way to calculate the ROI of a marketing campaign is to integrate it into the overall business line calculation. You take the sales growth from that business or product line, subtract the marketing costs, and then divide by the marketing cost like so:

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

So if sales grew by $1,000 and the marketing campaign cost $100, then the simple ROI is 900% (($1000-$100) / $100). That’s a pretty amazing ROI, but it was picked more for round numbers than for realism.

Campaign Attributable ROI

For the marketing ROI to have any real meaning, it is vital to have comparisons. Monthly comparisons can help show the impact more clearly. Using a 12-month campaign lead up, you can calculate the existing sales trend. If sales are seeing an organic growth on average of 4% per month over the last 12-month period, then your ROI calculation for the marketing campaign should strip out 4% from the sales growth. So it becomes:

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

So let’s say we have a company that averages 4% organic sales growth and they run a $10,000 campaign for a month. The sales growth for that month is $15,000. The calculation goes: ($15,000 – $10,000) / $10,000 = 50%

On the flip side, companies with negative sales growth need to value the slowing of the trend as a success. For example, if sales drop $1,000 a month on average for the last 12-month period and a $500 marketing campaign results in a sales drop of only $200 that month, then your calculation centers on the $800 ($1,000 – $200) you avoided losing despite the established trend. So even though sales dropped, your campaign has an ROI of 60% (($800 – $500) / $500), a stellar return in the first month of a campaign allowing you to defend sales before growing them.

Challenges with Marketing ROI

Once you have a fairly accurate calculation, the remaining challenge is the time period. Marketing is a long-term, multiple touch process that leads to sales growth over time.  The month over month change we were using for simplicity’s sake is more likely to be spread over several months or even a year.

Another challenge is that many marketing campaigns are designed around more than just generating sales. It maybe worth considering hiring a top marketing manager to help. These can include things like brand awareness via media mentions, social media likes and even the content output rate for the campaign. These spin-off benefits shouldn’t be the core of a campaign because they can’t be accurately measured in dollars and cents. But there are other metrics to consider too. While we’ve been focusing on sales growth, many campaigns are aimed at increasing leads. In this case, you need to estimate the dollar value of the leads by multiplying the growth in leads by your historical conversion rate (what percent actually buy).

The Bottom Line

To be clear, marketing is an essential part of most businesses and if you don’t have sufficient skill in house outsourcing your marketing maybe a good idea. To make the most of your marketing spend, however, you need to know how to measure its results. The ROI of any marketing campaign ultimately comes in the form of increased sales. It is a good idea to run your calculation using sales growth less the average organic growth on a regular basis throughout any campaign because the results do take time to build within your target market.

Source: Investopedia [abridged]