Experimenting is an essential (and an exciting) part of marketing. But, there always comes a time when you have to evaluate the effectiveness of your experiments to decide which ones to ‘kill’ and which ones to stick with.

This calls for looking at the numbers, i.e., knowing how to calculate the Return on Investment (ROI) from each of your activities. According to HubSpot’s State of Marketing Report, marketers who track ROI are 1.6x more likely to secure a higher marketing budget than those who don’t.

If you don’t know how to calculate Return on Investment or aren’t sure if you’re doing it correctly, you’re in the right place.

In this article, we will cover the return on investment definition, share a basic formula, and discuss the main challenges you might come across while calculating ROI.

Let’s start with the question – what does ROI stand for?

ROI stands for Return on Investment. It’s a metric that tells you how much monetary value your investment generated over time. You can use it to evaluate which activities brought in the most profit – all you have to do is take a deep dive into your marketing analytics. It’s one of the most commonly used metrics; no wonder, as it’s easily quantifiable.

ROI is applied across a variety of industries and departments. Some ROI examples include return on equity, return on assets, return on ad spend (ROAS), return on social media campaigns, etc.

When it comes to marketing specifically, you can use this metric to review how effective your marketing efforts were. Tracking ROI not only guides decisions on which marketing tactics or strategies to prioritize, and helps with campaign optimization but also comes in handy during budget setting. For example, by showing that your PPC campaigns brought in thousands of dollars, it will be much easier for you to get a budget for them next year.

After answering the question “what is ROI in marketing”, we can now take a look at how to calculate return on investment.

So, how is ROI calculated? The basic formula is quite simple:

[Amount gained – amount spent] / Amount spent x 100% = ROI

Let’s take this for a spin. Say you ran a Valentine’s Day marketing campaign across social media and your website’s blog, and want to know how much revenue it generated for the business.

For the purpose of this example, let’s assume that we’re looking solely at sales that have been a direct result of your campaign. Simultaneously, during an event as important in B2C as Valentine’s Day, you might also see sales from return customers, due to brand awareness, or the type of product you sell (one that might make a good present, like jewelry). This could make assessing your marketing ROI and attributing it to a particular campaign a bit more tricky, but that’s something we’ll take a deeper dive into in the future.

First, you look at how much your sales have grown during the campaign. You then take all the marketing costs, i.e., the money you’ve invested in creating marketing assets and executing the campaign, and subtract it from the sales growth. Finally, you divide the number left by the marketing costs. Let’s put this into the ROI formula.

[Sales Growth – Marketing Cost] / Marketing Cost x 100 % = ROI

Say you generated $5,500 more in sales as a result of the Valentine’s Day campaign. It cost you $1,000 to create all the marketing materials. After quenching the numbers, you see that your ROI on marketing is 450%.

($5,500-$1,000) / $1,000 x 100% = 450%

And there you have it – now you know how to determine ROI!

But, you’re probably wondering – would getting a 450% return on investment like in the example above be a huge success? Let’s discuss this next.

The case for ‘what is a good return on investment’ is pretty easy to work out. It’s about checking if the actions you take to grow the business contribute to your company’s goals.

You shouldn’t aim at defining one single marketing ROI value, as it could be misleading. Some activities require more investment to work than others. Or, the same type of assets might cost more or less depending on the platform you use.

One social media channel might have higher pay-per-click costs than another platform, which could make the ROI from the first one lower. But, if you won a high-value customer, from a more expensive channel, who stayed with you long term and generated a lot of profit, it would benefit your business for years to come. This shows that, when it comes to returning customers and longer sales processes, it’s worth tracking ROI not only right after the campaign, but over the course of several months.

Also, since marketing is such a broad discipline, you might not be able to measure and track your Return on Investment as easily for all of the activities and mediums you use to generate leads. For example, if you participate in real-life retail events, you might give out tens or hundreds of leaflets promoting your online store. Unless you ask each new client where they heard about you, create a dedicated landing page, or offer a referral code for participants, you won’t know how many of them learned about your brand by seeing you at the trade event.

The best way to establish what ‘good ROI’ means for you is to compare all the similar activities you’ve run in the past. This will give you a realistic benchmark you can always work towards or, better yet, seek to exceed every time to inspire further growth.

The truth is, there is no such thing as an average Return on Investment. We know that it’s good to have a reference point but what works for other companies doesn’t necessarily mean it will work for yours – so, don’t treat it as a measure of success.

The average ROI from marketing can differ depending on the industry, company size, customer lifetime value, and marketing tactics applied. So, if you’re looking for a one-size-fits-all type of answer, unfortunately, there isn’t one.

Some industries will experience a higher ROI from a specific channel because they operate in a less competitive market. While others will get a much lower ROI, not due to mistakes, but because they face more competition.

Here’s a tip – instead of comparing yourself to others, focus on your business. Track and analyze your ROI continuously. If some of your marketing activities don’t yield any results, eliminate them and concentrate on what works. This will also help you plan your marketing spend more effectively.

It all depends on how each expense and revenue generation channel contributes to the company’s overall profitability.

While there is a formula that lets you calculate Return on Investment (ROI) in marketing, you might face a few challenges during the process. Here are some of them:

👉Attribution modeling:

Attribution modeling is about granting credits to each touchpoint in the customer journey, such as app installs, clicks, impressions, etc. Since a lot of businesses use multi-channel marketing, it can be difficult to figure out which marketing activity contributed the most to conversions.

👉Long sales cycles:

Some companies, especially those in the service or B2B sectors, have longer sales cycles, meaning that it takes a while before a lead becomes a customer. During that time, marketers and salespeople can take several steps to speed up this process. Tracking all of these activities and understanding which one exactly resulted in conversion can be problematic.

👉Cross-device tracking:

Lift your hand if you have never jumped between devices before finalizing your purchase. You started viewing products on your mobile and then you switched to your laptop to pay for your products. This is yet another challenge that makes calculating ROI accurately much harder. Because if they started their journey on a laptop, but converted from their mobile device, the initial session might not be attributed to the same person.

👉Access and insightfulness of your data:

If you can’t access complete data on your marketing campaigns and long-term activities, you might have a distorted image of what works and what doesn’t for your brand. For example, a flawed approach to data collection could result in a lack of campaign IDs, making it hard to distinguish between sales that took place ‘organically’ and those that were inspired by a heavily promoted, special event like Black Friday.

Other issues could result from your marketing analytics tools being incorrectly configured, or having a poor UX, making deriving accurate and complete insights much more difficult without manual work.

👉External factors:

Even those who’ve mastered the art of marketing optimization and sales predictions can’t always foresee what will happen. External factors like political events, sudden economic struggles, or a shift in social climate can all dramatically lower your ROI. Or, they might cause a huge, but short-lived spike. A great example would be how hotels lost and e-commerce brands won clients during the pandemic.

👉Complex customer journeys:

Today’s customers interact with anywhere between 8 and 12 touchpoints before they’re ready to buy. Sometimes, they’ll just view your ad in their social media news feed, without clicking or reacting to it. They might visit several landing pages before heading back to your store to finalize the purchase. To correctly map all of these client journeys, you might need to be quite the marketing analytics pro.

👉Seasonality:

You probably immediately thought of Christmas, and you’re 100% correct in doing so. Some marketing endeavors will follow a ‘fast track’ during seasons when there’s a high demand for products like yours. So, comparing the ROI of a non-holiday period to the last quarter of the year could be very misleading and affect your perception of the tactics that work.

👉Dynamic changes in market conditions:

Market conditions are similar to the above-mentioned external factors in that you can’t always predict them. When they happen, you need to revisit all of your ROI assumptions and re-calculate them so that they reflect the market reality. Things that could creep in include sudden price drops from competitors, a change in customer priorities, or even new technologies that emerge in the market.

Hopefully, you’ve fully grasped the ROI meaning. Understanding how much revenue each of your actions generates is crucial for any business. Knowing that one type of marketing asset or distribution channel works better than others will help you thoughtfully allocate your financial resources.

The sad reality is that, often, marketing is the first to be cut down on when a company is struggling or preparing a plan for an economic slowdown. Tracking your ROI and showing that your marketing work generates profit for the company lets you retain buy-in from decision-makers. After all, they won’t be able to walk away from a channel that, for example, brings a 500% return and meets your growth goals, right?

Knowing the return on each type of marketing investment i.e. PPC, content marketing, ATL, etc. will also make you a better marketer, who makes decisions based on data and, ultimately, what’s best for the company’s profitability.