Understanding how to calculate marketing ROI for any small business is important for several reasons. It will help you determine what marketing channels are working, what channels aren’t, and where you should continue to invest your marketing funds to increase revenues.
In this blog we’ll cover:
So, let’s jump right in.
1. HOW TO CALCULATE MARKETING ROI
The basic formula to calculate marketing ROI is a lot simpler than you think.
All you need to do is subtract your marketing cost from the net profit made on sales and then divide it by your marketing cost.
Marketing ROI = (Sales Profit – Marketing Spend) / Marketing Spend
So, let’s assume you made a net profit of £5,000 from a marketing campaign and it cost you £1,000 to run. Your marketing ROI is calculated as the following:
In other words, Marketing ROI = (£5,000 - £1,00) / £1,000 = 4.
In this example, for every £1 spent, a profit of £4 was made leaving you with an ROI ratio of 4:1.
2. WHAT IS A GOOD MARKETING ROI?
How to calculate marketing ROI might be a simple formula, but determining what is a good marketing ROI isn’t quite as simple.
In our example above we achieved an ROI ratio of 4:1. In most business scenarios this would be considered a healthy ROI. Anything around the 5:1 mark is considered good, and anything of 10:1 and up would be excellent.
On the flip side, anything lower than 2:1 would be considered not profitable as the business is only breaking even on its marketing spend and therefore not growing. Revenues might be higher but so are costs.
Determining a Good ROI
This is only a rule of thumb. Different factors can determine what may be considered a poor ROI for one business or industry, could be great in another. This is purely because marketing channels are different in nature and serve different purposes.
If you’re dealing with a channel such as PPC, data is often trackable and attributed to specific campaigns making it a lot easier to calculate ROI of this particular channel. Whereas with Content Marketing for example, it’s harder to determine if your blogs, infographics, or videos have resulted in a purchase.
See the below section on Measuring ROI for Different Channels to get a better idea on what you should consider for different channels.
3. THE IMPORTANCE OF MEASURING ROI
Being able to calculate the return on your marketing spend is critical for all small businesses as it helps to inform business decisions and where to focus marketing budgets.
Establishing Marketing Spend
As a rule of thumb, businesses looking to grow should be investing in the region of 5% to 10% of revenue into marketing as a minimum.
However, if your business is unsure how your marketing is contributing to your bottom line, setting these budgets becomes a lot harder. But if you’re robustly measuring your marketing ROI you can make more informed decisions on the potential return at different levels of investment.
Allocating Marketing Budgets
Knowing how much to spend is one thing, knowing where to put it is a whole other challenge.
Most businesses should be marketing across a variety of different channels. From PPC and SEO, social media to Email Marketing.
However, if you’re not measuring ROI across the entire marketing mix, you’ll be unable to effectively distribute your budgets to the channels and activities that generate the biggest ROI.
Measuring Campaign Success
One of the most critical but often overlooked elements of marketing is measuring success. This is important for several reasons:
It helps marketers establish what works and what doesn’t
They can use results to determine benchmark performance and compare against past and future campaigns
They know where and when they should utilise different marketing channels
Not all channels are suitable for every business, so when working in any channel, being able to set clear KPIs and measure the success of those campaigns can help inform your marketing strategy. Whether that’s to withdraw from one channel, increase spend in another, or enter a new one entirely. If you’re not measuring individual campaign success, you won’t be able to make any meaningful decisions.
Competitor Analysis
Marketing performance is both subjective and relative. As mentioned above, what may be considered a good ROI in one industry may be bad in another. So, taking generic benchmarks is not best practice.
Instead, compare your marketing efforts against those of your competitors. With multiple marketing tools out there, we’re more equipped than ever to benchmark your own performance against your competitors.
You might be surprised by the results. But this can work both ways. Where you think you’ve done poorly, you might be outperforming your competitors. But on the other hand, where you think you’ve performed well, you may be falling short.
4. MEASURING ROI FOR DIFFERENT CHANNELS
If you’re utilising multiple marketing channels in your marketing strategy, you’re off to a great start.
However, each of those channels will generate different ROIs because of the nature of how they work. Although the formula to calculate marketing ROI will be the same across them, the way you go about attributing the revenues and costs, as well as setting performance-based KPIs (Key Performance Indicators), will be different.
Below are a few examples.
Measuring Content Marketing ROI
Content Marketing is a great tactic to employ as part of your Inbound Marketing strategy. To calculate content marketing ROI, you need to consider the cost of production and distribution.
For example, you employ a freelance blogger to write a blog for your website. You then have to publish that blog on your site, as well as perhaps creating a marketing email and social media posts to promote it.
If we estimate that to cost a total of £600 to cover the cost of the external blog writer as well as the salaries of the internal team to publish and promote the blog, your cost for that content piece is £600.
How to Calculate Content Marketing ROI
In this example, our cost is £600. So, to measure the content marketing ROI, the blog needs to contain an actionable CTA. Let’s assume that CTA is a trackable link to a landing page where they win five paying customers each generating a profit of £500.
Here is how our ROI would be calculated:
(£2,500 - £600) / £600 = 3.16. So, the marketing ROI is just over £3 for every £1 spent.
Content Marketing KPIs
As well as measuring ROI for your content marketing, it’s worth identifying some KPIs to help you measure success. These could include:
Article or page views
Social shares and engagement
Downloads
Measuring PPC ROI
PPC (Pay-per-click) advertising is a very common tactic used to generate leads and sales.
Unlike many marketing channels, sales and conversions attributed to PPC are relatively easy to track and therefore measuring PPC ROI is pretty simple.
Here’s an example:
You’re a service business and you employ a marketing agency to manage your Google Ads campaign. They charge you £1,000 a month to manage the campaign and you have a total ad spend of £1,500 per month bringing your total costs to £2,500 per month.
How to Calculate PPC ROI
In this example, the Google Ads link to a landing page where prospects convert on an offer. Each customer is worth £1,000 per month over 12 months and each month they convert one new customer.
So, in one year the campaign cost £30,000 (12 x £2,500).
It has generated 12 new customers with a total profit of £144,000. (12 new customers x 12 month contracts x £1,000 per customer per month).
Here is how our ROI would be calculated:
(£144,000 - £30,000) / £30,000 = 3.8. So, the marketing ROI is just nearly £4 for every £1 spent.
PPC KPIs
As well as measuring ROI for your PPC advertising, it’s worth identifying some KPIs to help you measure success. These could include:
CTR (Click-through rate) - How many clicks your ad receives compared to the number of times it is shown
CPC (Cost-per-click) - How much it costs each time someone clicks your ads
Leads generated - How many leads or conversions can be attributed to your ad
Measuring Email Marketing ROI
Email Marketing has the potential to be one of the most cost-effective and profitable marketing channels. This is because one email has the potential to reach thousands of customers and doesn’t require any additional time or money to reach 100,000 people as it does just one.*
*Depending on how your ESP (Email Service Provider) charges.
Here’s an example:
You’re running a Black Friday promotion on one of your eCommerce store’s products and you create one email using your in-house marketing team. Based on the time to create that email and the team members involved, all in, the email has cost you £300 to produce and send.
How to Calculate Emal Marketing ROI
In this example, that email will be sent to 10,000 subscribers. You achieve a 20% OR (Open Rate) and a 10% CTR (Click-Through Rate). So, of those 10,000 subscribers, 2,000 opened it, and another 200 clicked.
Of those 200 that clicked the email, you had a conversion rate of 40% which generated a total of £4,000 of profit. An average of £50 per customer. 80 customers x £50 average profit per customer = £4,000 total profit.
Here is how our ROI would be calculated:
(£4,000 - £300) / £300 = 12.3. So, the marketing ROI on this campaign is a staggering £12.3 for every £1 spent. Now imagine you achieve the same OR, CTR, Conversion, and Profit metrics for the email, but it was sent to 25,000 subscribers. Your ROI would be a whopping 32.3.
Email Marketing KPIs
As well as measuring ROI for your Email Marketing, it’s worth identifying some KPIs to help you measure success. We’ve listed a few of these above already, but the best metrics to track for email marketing are:
Delivery Rate (DR) – What percentage of emails are being delivered to your recipients inboxes
Open Rate – Of those that were delivered, how many recipients opened your email
Click-Through Rate – Of those who opened the email, how many clicked a link
Unsubscribe Rate – Of those who received your email, how many unsubscribed from receiving future emails
5. METHODS FOR HOW TO MEASURE ROI
We’ve talked a lot about how to measure ROI in monetary terms. However, it would be naive to not consider and recognise other forms of marketing ROI. So, in this section, we compare Financial ROI vs. Non-Financial ROI and how you need to consider both to establish a healthy marketing strategy.
Financial ROI vs. Non-Financial ROI. What's the Difference?
When assessing the impact of your marketing campaigns, you shouldn’t solely look at financial elements.
Financial ROI, while vital, only paints part of the picture. It encompasses the measurable monetary returns directly attributed to your marketing campaigns — sales revenue, lead generation, or increased profitability.
However, the story doesn't end there. Non-financial ROI delves into the intangible, yet equally valuable, outcomes that might not be purely monetary.
These could include enhanced brand awareness, customer loyalty, and positive sentiment within your target audience.
Understanding Financial ROI:
Sales Revenue or Sales Profit:
Directly tied to the success of your marketing efforts, this is the most tangible form of financial ROI.
Lead Generation:
The ability of your marketing campaigns to attract and convert potential customers into leads, contributing to future revenue.
Exploring Non-Financial ROI:
Brand Awareness:
The extent to which your marketing activities elevate your brand's visibility within your target market.
Customer Loyalty:
Building a base of repeat customers and brand advocates who contribute to long-term success.
As you can see, by recognising and measuring both financial and non-financial aspects of ROI, you gain a more comprehensive understanding of your marketing impact.
This approach is essential for crafting strategies that not only drive immediate revenue but also cultivate a sustainable and resilient brand.
Consider your ability to retain customers over a longer period or for them to make repeat purchases. Although customer loyalty isn’t measured on the balance sheet, their long-term value and financial ROI increases the longer they remain a paying customer.
6. THE CHALLENGES OF MEASURING ROI
Measuring marketing ROI is critical for marketing success, but it's not without its challenges. Successfully navigating these hurdles is key to generating accurate insights and making informed decisions about your marketing strategies.
Here we explore some of the most common challenges of measuring ROI.
Attribution Issues
Challenge:
Determining which touch points in the customer journey contributed most significantly to a conversion can be tricky. Attribution issues arise when multiple channels play a role, making it difficult to attribute the success solely to one source.
Solution:
Use multi-touch attribution models to move beyond simplistic attribution models and adopt approaches like linear attribution or time decay models, which distribute credit across multiple touch points.
Leverage marketing analytics tools to track and analyse customer interactions across various channels, providing a deeper understanding of the customer journey.
Data Accuracy
Challenge:
Inaccurate or incomplete data can severely impact the reliability of your ROI calculations. From inaccurate conversion tracking to flawed customer data, maintaining data accuracy is an ongoing challenge. The sooner you crack it, the more reliable your decision-making will become.
Solution:
Regularly auditing, validating, and analysing your data will help identify and rectify inaccuracies before they become widespread.
Integrating your data sources reduces the risk of discrepancies and enhances overall accuracy. It allows you to generate a single view of customer engagement and touchpoints helping you better understand how and where customers are engaging with your marketing campaigns.
Long Sales Cycles
Challenge:
In industries with extended sales cycles, attributing conversions solely to the most recent touchpoint may not reflect the true impact of earlier marketing efforts. Buyers can have between 6 and 8 touch points and sometimes more, before they convert. If you aren’t tracking and recognising these touch points it makes it difficult to attribute sales to channels and departments.
Solution:
Implement lead scoring models to assign value to various touch points based on their significance in the customer journey.
Use marketing automation to generate an action – that could be an email, a sales follow-up, or a discount.
Then use this information to develop comprehensive customer journey maps to visualise and understand the entire sales process, ensuring that every touch point is covered.
Setting Unrealistic Targets
Challenge:
We all want our marketing to be a success but setting unrealistic targets for success, or even worse, setting the wrong targets, are going to set you up to fail before you’ve even started.
Solution:
Determine the most appropriate metrics and KPIs to track per channel based on its role within the campaign. Whilst leads generated from a sales outreach email might be appropriate, this wouldn’t be the most suitable KPI to set for a new blog post.
Use past campaign data and competitor insight to help set realistic benchmarks for success and targets. If you’re running a PPC campaign identical to a competitor but they have double the ad budget, you can’t realistically expect your campaign to perform better or as well as theirs.
Focusing on Short-Term Results
Challenge:
Whilst it is appropriate to track and manage short-term metrics such as click-through rates, website visitors, and social engagements, marketing is a long-term strategy, and the impacts of your campaigns may not always be immediate either financially or otherwise.
Solution:
Use SMART objectives and get buy-in from key stakeholders to ensure everyone is aware of what success will be judged on and by when.
Split your KPIs into short, mid, and long-term goals. If you’re running a multichannel campaign, results from PPC campaigns although they may be more instantaneous than SEO for example, the long-term benefit and ROI of SEO could far outweigh that of your PPC campaign.
7. HOW TO IMPROVE MARKETING ROI
Set Clear Targets
From the very outset, you should always be looking to align your marketing strategy to your business objectives.
Establish the primary goals of the business and build your strategy to achieve these. Align performance KPIs and tracking to the metrics that best match with those goals.
Invest in the Right Areas
Once you’ve established your business objectives you must identify the channels that are best suited to helping you achieve these goals.
If building brand awareness within a new customer segment is the primary goal, running an email program targeting existing customers isn’t going to help you achieve this goal.
Instead, understand the role each channel plays in your strategy and use it to achieve the objective it’s designed for.
TIP: Why not explore a Marketing Audit that will help you understand what's working and what isn't? This way you can better align your marketing budgets with marketing channels and activities that produce the best results.
Understand the True Cost of Marketing
The cost of marketing can come in multiple forms – staff costs, freelancers, agencies, media spend, and so on.
To calculate marketing ROI, you first must understand the true cost that has enabled each campaign so that you can accurately measure ROI. The cost of a PPC campaign isn’t purely ad spend. There is a lot of time that goes into the strategy, creative, and management of the campaigns that all need to be factored in.
TIP: Be objective and fair when it comes to judging both marketing performance and marketing ROI. If you have an in-hosue team as well as an outsourced marketing provider, both should be responsible for delivering ROI in their respective fields.
Utilise Technology
Use analytical tools to help identify trends within your marketing campaigns. Feed them with data from all your marketing sources to get a clearer picture of what’s working and what isn’t.
Test, Monitor, Adapt
This should need no introduction. The reality is you’re unlikely to get it right the moment a campaign goes live. This shouldn’t be seen as a negative and instead seen as an opportunity.
Monitor performance closely and interrogate the metrics to identify areas for improvement.
Implement A/B split testing to validate your theories and don’t be afraid to use this information to adjust the campaign to generate better results.
WHAT’S THE SECRET TO MAXIMISING MARKETING ROI?
The reality is, there isn’t a secret. But if you follow the recommendations set out in this blog, you’ll have a much better understanding of how to calculate marketing ROI, how to measure ROI,
and how to improve your marketing ROI.
As a small business every penny you spend needs to be valued and thoroughly considered. And marketing should be no exception. It’s a vital cog in your business that helps drive business growth and generate profit.
The journey from viewing marketing as a cost to embracing it as a strategic investment begins with mastering the calculation of ROI. Armed with this knowledge, you can make informed decisions, maximise your budget, and propel your small business toward sustainable growth.
How Can We Help You Improve Your Marketing ROI?
We understand that small business leaders often must wear multiple hats. Some of which they may be more accomplished in than others. If marketing is one of those hats you don’t feel comfortable wearing, we can help.
We’re a specialist small business marketing agency with a mission to help you realise your potential. By working closely with our clients, we help to build marketing strategies designed to achieve business goals, profitably.
Find out more about how we can support your business by scheduling a marketing consultation where we’ll discuss your business goals, and current marketing, and make recommendations on how and where you should take your marketing.
Don’t delay, book your free, no-obligation marketing consultation today.
