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Marketing is a perfect example of the old saying, “you have to spend money to earn money.” If nobody knows about your product, you won’t be able to sustain the business. We all know marketing is important for any business. But it’s even more crucial to be able to measure its effectiveness. Marketing ROI is the answer.
What is ROI? Internet Marketing Services Marketers want to know whether their efforts translate into revenue growth. It is now easier than ever to determine the ROI of marketing, and digital advertising in particular, thanks to the proliferation of online marketing and the abundance of data that marketers have access to.
We, humans, spend money on products without evaluating their effectiveness. Consider vitamins. Vitamin C is good for us, but we do not measure it daily. If a bottle of Vitamin C was $20,000, you might be more inclined to buy it.
The majority of companies invest a lot in marketing. The amount of money that is spent annually on media will reach $2.1 trillion globally by 2019.
What are the benefits of measuring ROI
At a basic level, measuring your return on marketing investment offers you four primary benefits.
1. You need to justify your marketing expenses. A restaurant, for example, spends money to run a Facebook campaign. They want to know whether those who view that ad enter their establishment.
2. Determine the most efficient efforts. Measuring ROI can be done case-by-case. You can decide how best to allocate your marketing budget between channels. For example, data shows video ads convert customers more than photo ads. You decide to allocate more marketing budgets in the future for video productions.
Related: How to forecast SEO profits
3. Ensure your marketers are seeking the company’s interests. If you watched the television show Mad Men, you may have noticed that the marketers talked exclusively about the creative aspects of their campaigns and said almost nothing about how much money the client would make. In the 1960s, marketing was not as data-driven. The cleverest slogan was deemed the most successful. Today, marketers must place their company’s bottom line as their number one priority and creative personal goals at number two. You can hold your marketers accountable by measuring MROI frequently.
4. You can learn from the financial statements of your competitors. It allows businesses to share information about their marketing costs and margins. If you see that your competitor spends less on marketing but gets twice as much return, you know you have much room to improve and should change your marketing strategy.
The Challenges of Measuring ROI
Digital marketing can be challenging, even though measuring ROI can be beneficial.
Multiple Touches – touches refer to the interactions between a company and a consumer required to convert a lead to a customer. A customer’s journey may look something like this:
Initial brand awareness is established > subscribes for email > receives marketing emails > views product tutorials > sees a targeted ad
You can see that there are many marketing activities and touchpoints. It is difficult to determine which one created the greatest motivation to purchase.
Measuring the right time Marketing efforts can sometimes take a while to pay off. Your customer might love your product and ad but not need it now. In a year, when they are ready to purchase, they will remember your ad and make a buy. The campaign may have already ended by then, and you could not accurately classify your return on investment. Marketers are challenged to choose the best time to attribute a campaign’s return.
Uncontrolled Variables – Circumstances beyond the company’s control may be responsible for a shift in sales. It could be that the economy is struggling, or it might be summer, and short shorts have returned. Your company specializes in short shorts, which is a great advantage. It’s difficult to tell if your marketing is working when other factors are at play.
Variations of influence – Marketing campaigns do not affect everyone the same way. Most people might not feel anything when they see an advertisement for a social media campaign. Perhaps the ad resonated with one person who made a large purchase. It is difficult to determine the effectiveness of a campaign in this type of situation, which can skew data.
How do you determine a good ROI
The ratio of marketing costs to net revenue is the financial measure of marketing ROI. Calculating the ratio is a simple way to simplify ROI. This formula for marketing ROI is calculated by subtracting the campaign costs from the campaign’s net profit and dividing the result by the campaign cost. In an ROI formula, that would be:
ROI = Incremental Profit / Campaign Cost
What is a good marketing ROI ratio? You would like a positive ROI of at least 5:1. You can also look at it in dollars. You earn $5 for every dollar spent on marketing. Successful companies spend less than 20% of their revenue on marketing to get a positive ROI. The benchmark for a truly exceptional company is 10:1.
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