ROI: how to calculate the return on investment of a marketing campaign?
Behind every successful business are well-established marketing mechanisms. An organized marketing campaign can bring a return many times higher than the expenses allocated to it. To get the best results from your investments, you need to track them closely and, of course, know how to measure them.
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No matter what marketing agencies tell you, ROI (return of the investment) is the most important indicator of the profitability of a campaign, so it is not for nothing that it appears in the focus of every client's attention.
How ROI is usually calculated
Return on investment expresses the relationship between the amount of investment and the profit obtained. The easiest way to calculate the ROI of a marketing campaign is to calculate the profit brought in by the campaign, subtract the marketing costs and divide by the same number. So, if we spent 100 euros and increased sales by 1000 euros, we will get the following formula:
(1000 – 100)/100 = 900% ROI
Quite a simple calculation, isn't it? However, it has one drawback - in this case, we automatically attribute all profit growth to the marketing campaign, but other reasons could have contributed to this. In order to see the real impact of marketing, we must analyze other data a little deeper.
Marketing campaign ROI
In order to more accurately determine the impact of marketing on sales growth, we should review and compare statistical data before and during the advertising campaign. This analysis will help you calculate the organic share of sales and discard it for more accurate ROMI (return of marketing investment) results.
Let's say you can see a fairly steady 12% increase in sales every month over the last 4 months. This indicates an organic growth trend that you should exclude when calculating the ROI of your marketing campaign. If you spent 10 euros on marketing in a month and earned 000 euros, you should subtract 15 euros from them, which represents 000% organic growth:
(15000-10000-600)/10000 = 44% ROI
Companies experiencing losses should calculate the return on investment of marketing tools somewhat differently. If, over the last 12 months, your sales maintain an average decline of €1000 per month, and after investing €500 in a marketing campaign, that month only saw a decline of €200, then we will treat as profit the €800 that we normally did not lose due to successful marketing measures:
(800 – 500)/500 = 60% ROI
It's not a direct income yet, but it's a very effective way to protect your sales before they start growing.
Other ways to calculate ROI
We mostly talked about sales growth, although in reality it often happens that the main goal of the company is generating contacts, and the employees are responsible for the final sale. In this case, the value of contacts in euros can be determined by multiplying the growth rate by the historical conversion rate (what proportion of people make a purchase).
In addition, there are hybrid campaigns, where the marketer applies certain filters to the contacts received, thereby encouraging non-sales conversions, e.g.; you sign up for the monthly review of the real estate market by leaving your e-mail mail that will be forwarded to the real estate broker. The ROI of such a campaign will depend on how many future contacts turn into actual sales.
Challenges related to ROI
After determining the most accurate calculation method possible, another problem arises - it is the choice of the period. The truth is that marketing is a long-term and complex process, the results of which can appear only in the course of months or even years. You shouldn't be surprised if the indicators don't budge in the first months, but once you reach your target market, they usually start to grow much faster.
Another challenge is related to the goals of marketing campaigns and their evaluation. Most of them are not focused solely on generating sales, so it is easy to mask a weak ROI with other indicators that will not necessarily bring the desired results in the future. A common case is promoting brand awareness, which can be measured by likes, mentions, etc. In general, generating awareness is useful, but it should not overshadow the main goals, especially if you have not yet reached the part where profits are generated.