We practice ROI calculations every day without even realising it.
We spend money on petrol, expecting our cars to drive us until the tank empties again. We eat food and expect it to reward us with enough energy to last until the next meal. We work out and exercise, expecting to get lean and build muscle.
Yet ROI is a complex concept when it comes to marketing, and many businesses have a hard time conceptualising what it is and how to calculate it. They invest money into marketing campaigns but don’t fully understand how to calculate the returns and use that data to make more informed marketing decisions.
Every marketing endeavour requires an investment, whether it’s time or money or both. And calculating your marketing ROI correctly is key to growing your business because it helps you comprehend what works and what doesn’t.
This article will guide you through what ROI is, best practices, and how to calculate it for your marketing campaigns.
What Is Return On Investment (ROI)?
Return on investment is the return you generate after investing in something, minus the costs of investment.
When you buy a fixer-upper house and invest money into updating it, you expect your home’s value to increase, rewarding you with more equity. When you sell your home, the home’s selling price minus your total investment (home + renovations) is your return on investment, or ROI.
ROI is no different when it comes to marketing. Every marketing strategy you invest time and money into launching must reward you with a return. Otherwise, there’s no point in executing it.
How Do Marketers Use ROI? What Are The Benefits?
Let’s dig into ROI a little more and discuss how it affects marketers.
A lot of marketers track sales only. This is good, but only tracking sales for marketing campaigns is unfruitful and doesn’t tell your campaigns’ whole story.
Let’s say your campaign yielded 100 new sales and $100,000 of revenue. That would be a win, right? Well, we don’t know yet until we dig into the numbers more.
In simple terms, if you spent $120,000 executing those campaigns that yielded $100,000 in revenue, you lost money—$20,000 to be exact. Funnelling more money into this campaign will likely deplete your marketing budget without replenishing it.
We realise that this is a simple concept and probably already understood by most marketers—why would you funnel more money into failing campaigns? But, what do you do with your ROI after you calculate it?
There’s a reason why marketing ROI is necessary to calculate. Yes, it comes down to dollars and cents, but typically there are other dynamics at play.
Fund allocation: Know what’s working and what isn’t
It’s crucial to justify marketing spend so you can allocate budget toward new strategies. The only way to do this is to calculate the ROI of your marketing campaigns. If a campaign is not producing an ROI, there is little justification for launching another similar campaign. Knowing your campaign’s ROI can help you understand what’s working and what isn’t so you can allocate funds more deliberately and have total control of your marketing budget—instead of your budget controlling you.
Master adjustments in marketing spend
Let’s say that you launch both a Facebook ad campaign and a PPC campaign on Google. Both ads result in 100K in revenue, but your Facebook campaign yields a 50% ROI, while your PPC campaign yields a 75% ROI. Though the gain is the same, your PPC ads are more lucrative, but you would never know that without calculating the ROI and taking into account the initial investment.
But, that doesn’t mean you abandon your Facebook ads entirely. You can try to invest a few more dollars into Facebook ads by optimising your ad copy and imagery. Knowing the ROI empowers you to rework your marketing budget appropriately, without wasting money on underperforming campaigns.
Identify lucrative opportunities
It’s also not uncommon for marketers to get caught up in the “throw everything against the wall and see what sticks” methodology.
What you are doing is trying a bunch of random strategies and hoping one will bring an ROI. You are entering the game blind, without any pre-planning that will allow you to strategically run the marketing campaigns which are more likely to win.
So then, we could argue that marketing ROI is not just a calculation that accompanies your campaigns. It’s also a vehicle by which to extract data that can inform future campaigns and help you spot potentially lucrative future opportunities.
The more data you collect over time, the less money you will waste on unnecessary campaigns that would have failed anyway.
Later on, we will go over this concept in more detail and also introduce to you TrueNorth. This marketing platform allows you to simulate marketing campaigns to predict their success before you even run them.
It’s Not as Easy as It Seems: Challenges With ROI Calculations
We can go on and on about how ROI is excellent, and it helps marketers. But, let’s face it; it’s not as simple as it sounds. Calculating marketing ROI gets super confusing, and it comes with its own set of challenges.
Multiple Touchpoints During the Customer’s Journey
Most customer interactions are nonlinear and do not follow a typical pattern. In a perfect world, your ideal customer would find you from a Facebook ad and then go directly to your website and purchase immediately. But, this isn’t how it typically happens.
Let’s look at a typical customer journey:
- Clicks link in email to visit your website but does not purchase
- Follows you on Instagram and likes your images
- Sees your ad on Facebook and visits your website; adds items to cart but does not purchase
- Five days later, they receive your cart abandonment email and finally purchase.
How do you calculate ROI? What was the piece of content or ad that resulted in the purchase? Without getting into the customer’s mind, there is no way of figuring this out.
Later in this article, we will discuss some scenarios on how you can calculate ROI for multiple touchpoints.
Time Duration Between Touchpoint and Purchase
In the example above, it was likely at least five days or more between the initial email link click and the actual purchase. Some customers will purchase on impulse, while others will need to weigh the decision for days or even months. Even if you have an average sales cycle duration for leads, things don’t always go according to plan.
Some strategies also take longer to execute than others (i.e. ad promoting a discount sale vs lead nurturing email campaign). Similar to multiple touchpoints, it becomes challenging knowing which campaign to use to calculate ROI.
Short-term vs Long-term
Calculating ROI is more than just comparing the initial investment to the final revenue numbers. Every marketing campaign starts with a goal. You may be running an ad campaign, but if your goal is brand awareness, calculating ROI off the short-term goal of getting sales will not give you an adequate picture of brand awareness. Focus on the initial goal of the campaign instead of just focusing on short-term ROI wins.
How to Calculate Marketing ROI
This section will cover how to calculate a simple ROI and then expand into other ways to get accurate calculations.
Simple ROI Calculation
It’s essential to understand the simple core ROI formula before you branch into more complex calculations. Here is the simple way to calculate ROI:
So, for example, if your growth was $1000 and your marketing costs were $750, the calculation would be:
($1000 – $750) / $750) = 0.333 x 100 = 33.3%
Multiply by 100 to get the percentage.
TrueNorth ROI Calculator
Want to calculate your ROI for different campaigns and strategies easily? Use our ROI calculator below, powered by TrueNorth.
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The simple ROI may not apply to every situation. If you run the same campaign every month, but the campaign also produces sales that are not directly attributable to your campaign, subtract the avg. organic growth from the ROI calculator.
Here is the updated formula:
(Sales Growth – Marketing Spend – Avg. Organic Growth) / Marketing Spend = Marketing ROI
Example: Your monthly marketing campaigns for the last 12 months yield 5% growth on average that is not attributable to the campaign. Get the dollar amount by multiplying the 5% by the growth, which is $1,000. So $50 of your monthly growth is not attributable to the campaign.
($1000 – $50 – $750) / $750) = 0.266 x 100 = 26.7%
This number gives you a more conservative and focused estimate of your ROI.
ROI in Digital Marketing Best Practices (Plus Examples)
When you calculate ROI, it’s easy to forget some best practices. Let’s discuss them below:
Don’t Exclude Expenses
You can’t calculate ROI correctly if you don’t calculate your expenses accurately.
Campaign expenses include any and all costs related to the campaign, even secondary costs such as contract labour. For example, if you run a Facebook ad that contains ad copy and a video, in addition to the costs of running the ad, include the costs to create the copy and film the video.
Uncontrollable Factors
What if your website goes down during a campaign launch?
What if Facebook temporarily bans your ad?
What if a prominent influencer unknowingly featured your product campaign and your sales immediately skyrocketed?
Uncontrollable factors, whether wanted or unwanted, will impact your ROI calculation. Pay attention to these external factors and include (or exclude) them when calculating your ROI.
What’s a Good ROI?
This is a difficult question to answer since ROI will look different for every industry and business. It goes without saying that you are looking for a positive marketing ROI when evaluating your campaigns. But, what ROI percentage is adequate to justify re-running a specific campaign?
One way to determine if your ROI is good or bad is to review other campaigns’ historical benchmarks. For example, WordStream just analysed thousands of Google ads that equated to three billion in annual ad spend and listed industry conversion rates. Mailchimp publishes the average unique open rates, clicks and bounce rates for multiple industries. Compare these benchmarks (and others) to determine your ROI goals and projections.
Examples of ROI In Digital Marketing
Your ROI calculation may also change, depending on the type of marketing campaign you’re running. Let’s take a look at some examples:
Email marketing sales
Example: You’re running a discount campaign via email for your new product. First-time buyers receive a discount code in their email with a link to a special landing page. One thousand people visit your landing page, and 50 people purchase. Your sale price is $50, so your revenue is $250 ($50 x 50 sales). You spent $500 in marketing spend on this campaign. Here’s the ROI calculation again:
(Sales Growth – Marketing Spend) / Marketing Spend = Marketing ROI
Your ROI for this campaign is:
($250 – $500) / $500 = -0.5 x 100 = -50% ROI
Your ROI is negative, which means you spent more on this campaign than you received back in revenue (you lost money). If your sales were $750 instead, your ROI would be a positive 50%.
Tip: Don’t forget to include all of your email marketing costs in the ROI calculator, such as the email service provider’s cost plus any contracted labour.
Email marketing leads
What if you want to calculate the ROI of your leads for an email marketing campaign? You would need to know your lead’s cost or value by looking at past data on how many leads it takes to get a sale (on average).
The calculation for lead value is: Sale price / Number of leads to make a sale
If one out of every 10 leads convert, and your sale price is $1,000, your lead value would be $1,000 / 10, which is $100.
Example: You run an email campaign to generate more leads. The campaign brings in 100 new leads and costs you $200. The value of each lead is $100. Your growth or revenue is the number of leads multiplied by the lead value, which is $1,000 (100 leads x $100). Let’s input these variables into the ROI calculation:
($1,000 – $200) / $200 = 4 x 100 = 400% ROI
Also, consider lead referrals from these customers, so you do not underestimate each lead’s value. Your ROI could be higher if each customer refers more leads.
PPC campaigns
Example: You run a Facebook PPC campaign for your new product. Best practices suggest you run more than one campaign to split test different variables. For example, you may want to test whether a video ad or image ad converts higher.
It costs $400 to run the image ad and $1,500 to run the video ad since the cost of creating a video is higher. The image ad brought in $1,000 in revenue and the video ad brought in $2,000.
Image ad:
($1,000 – $400) / $100 = 6 x 100 = 600% ROI
Video ad:
($2,000 – $1,500) / $1,500 = 0.33 x 100 = 33% ROI
The video ad led to more sales and revenue, but the ROI was lower because the cost of creating a video ad is higher. This is why calculating ROI is essential. If you were simply looking at conversions and sales, you would have thought the video ad was the clear winner.
Influencer campaigns
Do you work with influencers to promote your brand and products? Influencer marketing is popular because markets do not need to create content and can access a large community of people without much investment. But, even though content creation costs less, not all influencer campaigns produce a positive ROI.
Calculate the ROI of each campaign by comparing the costs of working with the influencer plus creating content vs your returns. Typically, marketers give influencers a tracking URL so they can track sales from each campaign.
Let’s say your influencer sold $1,500 worth of product, and it cost you $300 for them to create a video.
Your ROI would be:
($1,500 – $300) / $300 = 4 x 100 = 400% ROI
But, what if you wanted to calculate ROI for engagement (comments)? Or maybe you want to monitor link clicks? You can calculate ROI for anything as long as you set goals and expectations upfront. Know your KPIs before you start your campaigns. This way, you can more easily organise your campaigns and weigh your results against your initial goals.
ROI for 3 Attribution Models
We discussed some of the challenges of calculating ROI in a previous section. Below are some ways to solve these problems by understanding the causal relationship between money in and money out (attribution).
First and Last Touchpoint
Remember when we discussed multiple touchpoints? Your customer does not follow a linear path to convert. They may visit your website numerous times and come from different touchpoints (social, email, ads, etc.) before they convert. To calculate ROI with multiple touchpoints, use the data associated with the first and last touchpoint to calculate the return on investment.
Multiple Touchpoints
First and last touch can exclude some actions that are integral to an ROI calculation. To account for these actions, you might want to use a multi-touch attribution model to calculate ROI instead.
In this model, you would review all of the actions taken before the final action or conversion. Each step would be weighted evenly. For example, if your customer took three actions to convert, each touchpoint equates to ⅓ of the total revenue.
Single Attribution With Projections
Time is a factor that disrupts the first/last touch ROI calculation model, as we discussed earlier in this article. What if your lead doesn’t convert for several months or more? You need to factor in the long-term impact of the time investment. In a case like this, use historical data to project ROI.
For example, if you held an all-day seminar in the past, which resulted in a specific number of leads over the proceeding six months, apply that data to your new seminar and forecast ROI for the next six months. It’s not an exact science, but it can help you make ROI projections that can inform your current marketing decisions.
We just discussed three separate attribution models, but if you are confused, read on and discover an easier way to crack this ROI code.
TrueNorth Simplifies Marketing ROI
We realise that in theory understanding the relationship between revenue and costs is much more complicated when discussing attribution and how to apply the ROI calculation. Business meetings on attribution can sometimes hold just as much tension as a loud-mouthed family discussion over current world politics.
Even though millions of dollars have been invested in solving these ROI complexities and we’ve attended business meetings ad nauseum, are we really any better off? Has anyone definitively solved the ROI attribution problem?
The closer we get to “perfect” attribution, the less confidence we have in our calculations—even though we invested more money and brainpower to get there.
Unless you’re Amazon or Nike, we would argue that investing time into perfecting the minute details of your ROI calculations might be overkill. The more marketing budget you have, the greater the value of measuring ROI more accurately.
Perfect attribution does not exist. As long as you’re directionally correct in your calculations, you can understand what’s working and apply your knowledge to make more strategic marketing decisions.
In TrueNorth, we apply an ROI to all marketing activities that utilise marketing spend and then use revenue generated to calculate ROI. If the revenue is unknown, we can use a similar campaign variable such as average customer value or leads.
We realise that simplifying ROI like this has its disadvantages. However, it’s still more advantageous to have a transparent directionally correct method of calculating ROI than to have no confidence in your calculation methods. Or worse, not to calculate ROI at all because it becomes too complicated.
Marketing, Simplified: The Difference Agile Makes
In addition to simplifying ROI, TrueNorth is a marketing OS that simplifies and organises your entire marketing process by making it more efficient. Gone are the days of flipping through Trello cards, Excel spreadsheets and clunky dashboards, which make it nearly impossible (or incredibly time-consuming) to see what’s really working.
Using an agile approach, TrueNorth helps marketing teams move faster and stay aligned. In contrast with conventional marketing approaches that complicate and lengthen the process while relying on flawed data, TrueNorth works in small iterative cycles to launch micro strategies. The result is the easy prioritisation and launch of new ideas, with fast-moving insights so you can learn and move faster as a team.
TrueNorth’s power is in its easy five-step process of setting goals, simulating marketing campaigns (simulate a campaign before you even launch it), creating and collaborating on ideas, making the campaigns live, and creating a roadmap to follow and track the results.
The magic happens when you compare the results of your campaigns. TrueNorth compares the same metrics regardless of where you run your marketing campaigns (Google, Twitter, etc.). This way, you can compare like to like when evaluating your ROI. The results also show your ROI predictions (from your initial simulations), actual ROI, channel, prioritisation, and more.
