The marketing world is full of acronyms. B2B, CTA, KPI, PPC, SEO…the list is seemingly endless. And you thought social media was confusing, LOL! Learning what these mean ASAP (bet you know that one!) is essential in helping you achieve your business goals, but it involves more than just memorizing abbreviations. You might already know that ROI stands for Return On Investment, but if you don’t know how to track ROI, you won’t know whether your marketing efforts are making an impact. We’re pretty sure you’d rather spend your budget on campaigns that are profitable, so we’ve put together a blueprint showing you how to track your ROI.
ROI is a profitability ratio that measures the efficiency of an investment by determining its net profit in relation to cost. In the simplest of terms, it tells you how much money you’ve made in comparison to how much money you’ve spent. The higher your ROI, the better your return—and therefore, the more valuable your investment.
ROI is invaluable in showing you which marketing programs are working for your company and which ones are not. This allows you to focus your efforts on profitable ventures and pull resources away from those that aren’t paying off for you. It allows you to make knowledgeable decisions when there are multiple options available and helps you justify your choices down the line. Because marketing departments are often the first victims of budget cuts, focusing on ROI is an excellent way to demonstrate to management the value of your marketing efforts.
As useful as ROI is, figuring out how it works exactly can be confusing. The following will help you determine your ROI for any particular marketing campaign.
There’s a simple three-step process to calculating ROI:
- Determine the initial cost of your investment. Be sure to include employee salaries, tools and software, distribution costs, paid promotions, and any work you had outsourced.
- Figure out the current value of your investment. Calculate the total revenue generated from your investment.
- Break out the calculator. Now that you’ve figured out the costs and profits associated with your investment, plug your numbers into this formula: ROI = (Net Profit / Cost of Investment) x 100. Let’s say you’ve spent $5,000 on a marketing campaign and have generated sales worth $10,000. Your net profit is $5,000, which means your ROI is 200 percent—(10,000/5,000) x 100. Because you spent less than you earned, that’s a pretty good return on your investment!
Pros & Cons of ROI
It’s important to note that ROI is just one tool to use when planning your marketing strategy. There are both pros and cons to ROI.
Advantages of ROI
- Simple formula for deciding where to allocate your marketing resources.
- Allows you to compare profitability among different divisions or investment opportunities.
- Provides more detailed analysis if required, such as profit margins and asset turnover.
- Summarizes the various components of financial planning including sales, costs, and profits.
Disadvantages of ROI
- Less comprehensive than other metrics; simple cost/benefit analysis omits additional intangible factors.
- ROI is tied into individual projects and won’t provide an accurate profit picture of the company as a whole.
- Requires a well-defined time period that focuses on short-term results and profitability.
- Can influence managers to make poor decisions based on individual rates of return rather than long-term value.