Measuring marketing ROI (return on investment) is one of the most crucial aspects of your entire digital marketing strategy. If you aren’t able to attribute sales or conversions to specific efforts, then there’s no way to know if your marketing is improving—or hurting—your bottom line.
With that in mind, we’re going to answer the following questions related to your return on investment (ROI) in marketing.
- What is ROI for marketing?
- What is a good ROI for marketing?
- How do you measure digital marketing ROI?
- Does marketing ROI factor in organic sales?
- How can I improve ROI for marketing?
- What’s the difference between ROI and ROAS?
What is ROI for Marketing?
Marketing ROI is the practice of attributing profit and revenue growth to specific digital marketing strategies. For example, say you spend $1 of your marketing budget. By measuring the ROI of that investment, you determine how many dollars you received in return that can be attributed to it.
You can measure digital marketing ROI comprehensively or on a campaign-by-campaign basis to determine your financial return. It is important to measure ROI to help justify where you direct your ad spend and how to allocate budget for ongoing and future campaigns.
What is a Good ROI for Marketing?
The rule of thumb for marketing ROI is to aim for a 5:1 ratio. That means that for every dollar you spend, you earn five dollars back in sales. That mark puts you in the middle of the bell curve. For reference, an ROI at a 10:1 ratio is considered exceptional.
An ROI at or below a 2:1 ratio puts most brands—especially those with complex supply chains, lower marketing budgets, or high overhead costs—in the red. That’s because the costs to produce and sell goods or services (i.e. cost-of-goods-sold, or COGS) is generally at least 50% of a product’s sale price.
Agile brands with lower COGS are an exception. The lower the COGS, the lower the ratio to be profitable.
But keep in mind that every brand is different. To determine a good ROI for marketing for your specific business, you need to consider your unique overhead costs, margins, and other factors unique to your industry.
How Do You Measure Digital Marketing ROI?
The goal should always be to measure how your marketing efforts move the needle on revenue for your business. You should know what you get out of what you spend—whether that is ad spend, labor costs, or time.
There are several formulas for calculating marketing ROI. The traditional formula used to calculate ROI measures marketing returns from a more macro-level and is fairly simple to use:
The Traditional Way To Calculate ROI
Marketing ROI = (Marketing Revenue – Marketing Spend / Marketing Spend) x 100
Here, ROI is often presented as a percentage, which is why you multiply your result by 100. Let’s consider an above-average 5:1 ROI ratio. If you spend $10,000 and make $50,000, then this is a 400% ROI because you have made an additional $40,000 from your spend ($50,000 revenue – $10,000 spend = $40,000 profit).
To exemplify the ROI equation:
- $50,000 – $10,000 = $40,000
- $40,000 / $10,000 = 4
- 4 * 100 = 400% ROI
To calculate your ROI with this equation, you’ll need the following information:
- Marketing revenue: The amount of money earned after deducting all expenses.
- Marketing spend: The total capital invested in the marketing campaign or strategy (i.e. the variable costs). This includes items like PPC spend, display ad clicks, content production costs, media spend, and digital marketing agency fees.
The traditional ROI calculation does have some limitations that we discuss below. However, you can mitigate these issues by comparing sales growth over several months to understand the direct impact of marketing campaigns and efforts for your organization.
How to Calculate Campaign-Attributable Marketing ROI
One of the issues with the marketing ROI formula is that it assumes total month-over-month sales growth is directly attributable to digital marketing campaigns.
To really know if your marketing is working, you need to put the results in context. One way to do this is by comparing current sales to monthly sales leading up to the launch of a marketing campaign or marketing investment—as mentioned in the previous section.
Another key consideration is organic sales growth. Organic engagement like mentions or follows on social media, a shoutout from a prominent figure or unattributable web traffic can skew your ROI results. These might not generate an immediate financial return or expense but they can still indirectly drive organic sales growth and impact your ROI.
To account for organic sales growth, use the following marketing ROI formula instead:
Marketing ROI = (Sales Growth – Organic Sales Growth – Marketing Costs) / Marketing Cost
For instance, say a brand that averages 3% organic sales growth runs a $15,000 campaign for one month. Total sales growth that month is $20,000. That means 3% ($600) of that growth is attributed to organic sales and should be excluded from ROI.
($20,000 – $600 – $15000) / $15,000 = 29%
In this example, the percentage dropped from 33% to 29% before and after factoring in organic sales. A 4% change can have a sizable impact on profitability so you should consider using this second equation for a more holistic overview of your marketing efforts’ effect on generating sales.
If all this math is making your head spin, use our simple ROI calculator instead! Just input the variables above and the ROI calculator automatically crunches the numbers for you.
Calculating ROI Through Customer Lifetime Value (CLV)
You can also calculate marketing ROI through CLV. Another problem with the traditional ROI formula is that CLV is not considered. But this metric is important because it tells you the value of each customer relationship with your brand. You can use this to assess long-term marketing ROI in a more granular way across your customer’s lifecycle.
The only catch with this method is that you need to understand how to account for CLV and customer retention.
Once you gather data on your CLV and churn, you can use the following equation to determine your marketing ROI based on CLV:
ROI = (customer lifetime value – marketing investment) / marketing investment
You can also use this formula to demonstrate ROI on metrics like customer acquisition costs (CAC), which tells you how much your brand spends to get one new customer. This is more complex than the traditional equation—but also more comprehensive.
Four Challenges of Measuring Marketing ROI
Confusing calculations aside, there are several other challenges to attributing and measuring the return on investment of marketing. Here are four things to look out for:
- With the ever-growing amount of digital marketing channels available, many brands struggle to attribute the ROI of their digital marketing tactics. Heck, marketers struggle with this metric, too. A HubSpot survey found that measuring the ROI of marketing efforts is the top challenge among B2B marketers.
- Measuring the ROI of PPC (pay-per-click) strategies is fairly simple. Platforms like Google automatically let you compare the return of your PPC ads. But attributing ROI to content marketing—even with tracking URLs and other web analytics tools—is a challenge. The Content Marketing Insitute admits this still feels like a shot in the dark at times.
- Aside from the substantial time investment required to measure ROI, whoever crunches the numbers also needs access to sensitive company financials.
- Patience is needed when it comes to measuring ROI for marketing. Marketing campaigns can last months so that can be how long it takes to gauge ROI. And remember that these campaigns don’t exist in a vacuum so you need to put your sales figures in context by comparing sales over a period of time.
How Can You Improve Marketing ROI?
Now that you understand marketing ROI in more detail, here are a few ways to improve it for long-term marketing success:
- Measure What Matters—Including Time
Determine key metrics to measure. Make sure to include ad spend, digital agency fees, overhead, other promotional expenses, and other variable costs mentioned above. These will dictate your ROI measurement strategies and what metrics give the most complete picture of your ROI. Double down on what works for your campaign efforts and cut out what doesn’t.
- Test Different Marketing Channels
If your sales go stale, try testing different marketing channels. You may strike gold with a channel you never thought to try before—and get a noticeable boost in your ROI. There are dozens of options here but you can start with this list:
- Email marketing
- Content marketing
- Social media marketing
- Paid search marketing (PPC)
- Search Engine Optimization (SEO) marketing
- Hire Marketing Specialists
Identifying the right attribution models to measure marketing ROI is a complex process. But if you just can’t nail down your marketing ROI—or simply don’t have the time—hiring digital marketing specialists is the most efficient way to streamline the process.
Are ROI And ROAS The Same Thing?
No, ROI and ROAS (return on ad spend) don’t measure the same things and don’t provide the same marketing insights.
Return On Investment shows overall investment including people, cost of marketing tools, digital agency fees, marketing dollars, and other variable costs. ROI is for determining overall profitability by accounting for all of your total marketing expenses.
Return On Ad Spend only considers if marketing campaigns were profitable based on your total ad spend. ROAS is for determining if your ads are working. It ignores the cost of tools, employees, and management fees and is based purely on revenue, not overall profit.
Ultimately, increased sales are the ROI of any successful marketing campaign. By identifying the return of your specific marketing campaigns, you can make data-driven decisions that continue to grow your brand. That’s what you aim for and that’s what you can now measure.
Just remember to be patient because positive ROI results take time to elicit meaningful data. However, if your marketing ROI falters over several consecutive months, you should consider changing up your marketing strategy. If it comes to that, a marketing audit is a great place to start.
Why wait? Find marketing audit specialists on the Credo Platform — fast and for free.