Whether you work in-house or have clients, marketing ROI is a critical component of making sure your marketing efforts are working — and proving to key stakeholders that you’re adding value.
In this post, we’ll review the data you need to pay special attention to when measuring ROI, as well as how to calculate ROI based on your campaign goals.
Prep work for calculating marketing campaign ROI
Crunching numbers and calculating ROI is the easy part. Most of the work goes into choosing the right ROI calculation for your business or campaign and then pulling the necessary data to plug into the equation.
Determine your revenue and marketing spend: Need I say more? For campaigns where sales are the goal, you’ll need to know your post-campaign revenue and total marketing spend. If you’re optimizing for leads or other non-monetary conversions, see below.
Calculate the value of future customers: For some campaigns, success is measured in conversions that will turn into revenue later — think lead form submissions, newsletter subscriptions, etc. But it’s still important to ascribe a dollar value to each conversion because, while these calculations aren’t exact, they at least enable you to get a general idea of how much money your hard-won conversions will bring in.
The two most common ways to calculate this are average purchase value (APV) and customer lifetime value (CLV). If your customers tend to only buy once, or very sporadically, you can stick to APV. But if your customers tend to buy multiple times or pay via subscriptions, CLV may be a superior metric to use.
Determine sales cycle length: Another variable worth considering is how long it will take the marketing campaign to show results. If your product or service has a high price point, your sales cycle is likely considerably longer than, for example, an e-commerce clothing company. Alternatively, you may find that the sales cycle for leads you gain at tradeshows is usually much faster than those generated through digital channels (or vice versa).
In either case, take a look at your historical data to determine your sales cycle length before running ROI calculations. That way, you can be sure you’re giving your campaigns enough time to generate revenue before you measure them.
How to find the right ROI calculation for your needs
At face value, calculating ROI is simple: Just subtract marketing spend from revenue to determine your ROI figure, and then divide again by marketing spend for your ROI percentage. But depending on the specifics of the campaign, it’s important to make small tweaks to this formula for the sake of accuracy (and to prove you’re doing your job!).
1) Your campaign is optimized for one-off sales
In this situation, you can stick to the simple equation for ROI percentage:
ROI = (Revenue – Marketing Spend) / Marketing Spend
Example: You run a Facebook ad campaign promoting your new jewelry line. You earn $5000 in revenue and spent $2000 on the campaign. Your ROI is then (5,000 – 2,000) / 2,000, or 150 percent.
2) Your campaign is optimized for non-monetary conversions that will turn into recurring sales
Similarly to the situation above, you want to assess how much money you stand to make based on customer lifetime value, instead of just one-off revenue. First, find your customer acquisition cost:
Customer Acquisition Cost = Revenue / New Customers
Then, plug in numbers to this modified ROI equation:
ROI = (Customer Lifetime Value – Customer Acquisition Cost) / Customer Acquisition Cost
Example: You run a beauty products subscription service and conducted a direct mail campaign to get new subscribers. You spent $5,000 on the campaign materials, and earned 50 new subscribers as a result, making your customer acquisition cost (5,000/50), or $100. Your customer lifetime value is $200, so your ROI stands to be 100 percent.
3) Your campaign is optimized for non-monetary conversions that will turn into one-off sales
Here, you can still use the original ROI equation, but you need to determine both your estimated ROI per lead and your sales conversion rate. First, find your customer acquisition cost:
Customer Acquisition Cost = Revenue / Total leads
Then, find your ROI per lead:
ROI per lead = Average Purchase Value – Customer Acquisition cost
Next, determine your forecasted revenue based on your lead to customer conversion rate:
Forecasted revenue = (Total leads * Sales Conversion Rate) * ROI per lead
Now, plug these numbers back into the normal ROI formula:
ROI = (Forecasted Revenue – Marketing Spend) / Marketing Spend
Example: You sell MRI equipment to hospitals and purchase a booth and sponsorship at a large trade show where your goal is to generate leads. You spent $100,000 on the sponsorship and earned 200 leads, giving you a customer acquisition cost of $500. If your average purchase value is $250,000, you could expect an ROI per lead of (250,000-500), or $249,500. If your lead to customer conversion rate is 5 percent, then you can expect 10 of those 200 leads to become paying customers, earning you $249,925*10, or $2,495,000 in forecasted revenue. Since you spent $100,000, that leaves you with an ROI of .025 percent.
But what about attribution for multichannel campaigns?
As a marketer, you know that in general, no campaign or marketing tactic makes money by itself. When calculating ROI for a marketing campaign, it’s important to decide in advance how (or if) you will factor in other touchpoints, and how much credit you’d like to give to them.
For example, if you’re running a single-channel direct mail campaign targeted at people who are unfamiliar with your brand, you can feel pretty confident giving 100 percent attribution to that channel — especially if you use proper tracking methods. However, if you’re running a promotional campaign that spans direct mail, email, and Facebook ads, you’ll need to decide if you want to calculate ROI by overall campaign spend, and/or break it down by channel.
To a large degree, this decision will depend on your resources. A holistic look at marketing spend in a multichannel campaign would definitely be easiest, but you’ll lose out out on important information regarding which channels performed best within the campaign. Breaking down the campaign by channel offers better insight, but requires more effort and resources.
What’s a marketer to do? At a minimum, calculate your ROI based on overall marketing spend. Doing so at least allows you to answer the question your stakeholders want answered most: Did this campaign generate revenue? From there, you can select an attribution model that can help you determine which channels contributed most to your ROI.
For more tips on attribution for multichannel campaigns, check out this post on how to dissect a marketing touchpoint.
Calculating ROI on marketing campaigns doesn’t have to be difficult. With a little prep work, you can choose and equation that works best for your campaign goals and business model.
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