Marketing business leaders and CMO executives face difficult decisions each year as budgets come up for evaluation and organizations look to create strategies for the next fiscal year. Among those challenges is evaluating how effective the marketing department is with the resources it already has.
A helpful tool that executives have in their kit is the marketing return on investment metrics. Marketing return on investment, or mROI for short, is attributing profits and revenue growth to the activities of marketers.
If this is a new metric for your business, calculating mROI starts as an estimate of marketing performance but can quickly evolve into reliable standards for determining success. Let’s explore the importance of marketing ROI, the components that make up mROI, and tips on improving your mROI.
Marketing ROI: A Brief Explanation
Quantifying the return on investment for marketing activities is essential for informed decision-making, resource allocation, and defining the extent of marketing budgets. By calculating mROI, businesses can gain insight into managing their efforts in a given marketing strategy and make adjustments to match challenges.
There are many reasons why calculating and understanding marketing ROI is crucial for success, including:
- Justifying marketing costs – Marketing expenses can balloon to upwards of 10% of overall business revenue, meaning marketing campaigns must provide an adequate return to justify those costs.
- Analyzing the effectiveness of campaigns – Combined with other marketing analytics, ROI can verify the success of various campaigns. Should conversion rates miss with one strategy, ROI can signal where funds are hemorrhaging.
- Compare marketing efforts with competition – Using marketing ROI calculations can help you benchmark your performance by comparing results with other businesses in your industry. You can further verify you are allocating marketing spend appropriately based on this comparison.
Marketing return on investment is an important metric to calculate and track. But, it does have its drawbacks, especially when considering what portion of your revenue comes from any given advertisement or marketing channel. Likewise, many calculations can neglect organic or repeat sales by only observing total revenue.
Key Components of Marketing ROI
Before you begin calculating your marketing ROI, you must compile a few other metrics essential for the formulas. These components could involve many of the following:
- Total revenue – Consider adding your business’s total revenue, especially for the basic marketing ROI formulas.
- Gross profit – Gross profit can give insight into how much your marketing spend compares with earnings directly associated with sales price.
- Net profit – Net profit considers the profits made after the cost of goods, services, and transportation. It can be a more precise indication of how much ineffective marketing eats into the bottom line.
- Marketing investments – Marketing investments include ad bids, ad space, and media time, but they also can consist of creative costs, like employing copywriters, graphic designers, and social media managers.
To get the most accurate insights into your marketing performance, be careful not to skew results unintentionally. Utilizing these components with the numerous methods of calculating ROI can give you what appear to be favorable results but, in reality, are underperforming assets.
Calculating ROI in Marketing
Marketing teams have many types of marketing ROI formulas to choose from. Let’s cover some of the ways you can incorporate marketing ROI into your organization’s KPIs, from simplest to more multi-layered approaches.
- Simple ROI: Using the most simple formula for ROI, you can gain an overview of how successful marketing investments are. Use this formula for ROI: (revenue growth – marketing spend) / marketing spend = ROI
- Campaign Attribution ROI: Assumes revenue growth is attributable to marketing activities and must have a comparison with pre-campaign revenue. Additionally, you can extract organic sales using the equation (sales growth – average organic sales growth – marketing expenses) / marketing expenses = ROI.
- Cost per acquisition (CPA) ratio: This tells you the initial cost of acquiring new customers, and you can calculate it by using (marketing channel spend / number of customers acquired) = CPA.
- Customer lifetime value (CLV): The total value a customer relationship brings to your business throughout the lifecycle of the customer. Combined with CPA, you can gain insights into the value of long-term marketing strategies, like SEO or PPC campaigns. Calculate CLV with the formula (Average customer value x average customer lifespan) = CLV.
Most marketing ROI formulas result in a formula, such as $5 in sales per $1 of marketing spend. That $5:$1 ratio represents a good marketing ROI, while anything in the $10:$1 ratio or higher would be outstanding. The strategy that rakes in the latter kind of ratio would clearly be the one to lean into.
Improve Your Marketing ROI: 5 Tips
We mentioned that a good marketing ROI is around $5 in revenue for every $1 in marketing spend. Anything lower than a $2:$1 ratio will cost you money, leading to negative ROI, which, of course, hurts bottom lines.
If you find yourself with something between $2 and $5 in revenue for every $1 spent, you could benefit from these five tips on boosting those results:
- Invest in long-term strategies – Long-term strategies, like content marketing, SEO, and email marketing, don’t pay dividends immediately, but in six to 12 months down the road, you can see significant gains.
- Build brand awareness with social media and digital marketing – The potential number of leads extends to the billions, and they are at your fingertips when you leverage the power of Facebook, TikTok, and LinkedIn.
- Invest in automation and AI – Technology can make it easier and faster to engage with your target audiences. Plus, AI can help identify trends within analytics that marketers miss, allowing you to capture more accurate data for informed decision-making.
- Make buying easier – Use strategically placed ads to direct social media and website traffic to product landing pages, reducing the number of touchpoints required to make a sale.
- Scrutinize your marketing analytics – Reporting platforms, CRMs, and other reporting templates can have missing, outdated, or hidden data. A solution like HYROS can fill in the gaps, allowing you to see the whole picture and preventing poor decisions based on false reporting decisions.
The HYROS platform can improve your ad tracking and provide AI optimization that can unify your omnichannel presence, from call funnels to e-commerce. Maximize your ad spend with the most informed decisions possible with a call to HYROS. Connect with us to see if we can help!
Monitor Your Marketing ROI With HYROS
Marketing is an essential department for successful businesses, and without dedicated professionals crafting campaigns, growing revenue would be excruciating. You can gain a clearer view of how these campaigns perform by analyzing marketing ROI.
Although there are many components and types of marketing ROI formulas you can use, this team of professionals can guide you on how to spend your resources, which strategies have the biggest payoffs, and keep teams accountable for spending.
Marketing can be hard enough without missing data and false reporting decisions. See why businesses are turning to HYROS to provide a better solution for obtaining your whole marketing effort picture. Watch the HYROS demo to see how you can boost your marketing spending with a little help from a revolutionary platform!