ROI in Marketing: Definition and How To Calculate It
Updated February 3, 2023
Return on investment (ROI) is a common concept in business that focuses on getting the most value out of each business expense. ROI is particularly important in marketing, where one of the primary goals is spending money to make money and attracting paying customers by using persuasive advertising techniques. Understanding ROI in marketing is an important part of assessing the financial viability of a project and developing a marketing strategy that drives success.
In this article, we explain the purpose and uses of ROI in marketing and show how to calculate and analyze marketing ROI.
What is ROI in marketing?
Marketing ROI, also known as MROI and return on marketing investment (ROMI), is the specific return on investment a company receives from the funds it spends on enterprise marketing. MROI compares the revenue benefits of a marketing campaign to its overall cost, with the goal of identifying the most cost-effective ways to increase earnings. You can use the return on investment of a specific project or the overall returns of all marketing efforts to document and assess the effectiveness of a company's marketing strategies compared to their cost.
Marketers measure ROI using a percentage to show the growth or loss that a marketing campaign creates within a company. A higher ROI indicates that each dollar spent on marketing generates high revenue. In contrast, a low ROI percentage shows a low amount of revenue compared to the cost of the marketing campaign. If a company spends more on marketing than it makes, it can have a negative ROI.
Why is MROI important?
Business owners and marketing professionals rely on data-driven measurements like marketing ROI to decide how to allocate their budget. ROI helps the people involved with a marketing project to understand whether they are using their resources effectively, with a higher ROI indicating a more successful strategy. Marketing departments should regularly track the ROI on various campaigns to maintain these key functions:
Awareness of their financial health: Marketing ROI allows marketers and business owners to understand the amount of profit they generate from each project. ROI can provide additional nuance to overall sales figures and revenue by showing the factors responsible for attracting the most revenue.
An understanding of competitors: Many marketing and business professionals compare their marketing ROI to their competitors to understand the efficiency of their marketing campaigns related to others in the industry. If other companies have a higher return on their marketing investment, you can consider studying their strategies to see what you could improve.
Prioritization of current projects: By measuring the ROI on different marketing campaigns, you can identify which ones get the most value out of each dollar spent and prioritize working on those campaigns. ROI can also show which marketing projects aren't bringing in enough revenue, allowing you to reconsider your marketing strategies or even decide to cut your losses and end that specific campaign.
A selection of future projects: Recording ROI for different marketing campaigns can help you identify patterns in what marketing methods are most successful with your target audience and bring in the most income. Marketing ROI can help you refine your marketing strategy by learning from past successes and failures.
Related: What Is Content Marketing?
How to calculate ROI
Determining the marketing ROI for a project involves performing a few simple calculations. After implementing a marketing plan and letting it take effect on the company's sales, you can calculate ROI for marketing by following these steps:
1. Select the appropriate formula
There are two different formulas for calculating marketing ROI:
The simple ROI formula provides a general overview of how revenue has changed compared to marketing expenses. This basic calculation can be a useful guide when comparing one company's marketing expenses to its competitors:
Marketing ROI = (overall sales growth - overall cost of marketing) / overall cost of marketing
Adjusted ROI formula
The formula for adjusted ROI, or campaign-attributed ROI, provides a more detailed overview of how marketing campaigns specifically impact a company's growth. When calculating adjusted marketing ROI, measure the average sales growth of the company before implementing a new marketing strategy to determine a baseline of average sales growth. This number can help you recognize how much a marketing campaign directly influenced growth compared to the natural revenue change it experienced regardless of advertising strategies.
The formula for adjusted ROI is:
Adjusted marketing ROI = (overall sales growth - average baseline sales growth - overall cost of marketing) / overall cost of marketing
2. Set a time frame
Determine an appropriate time frame for gathering data on sales growth that can provide the most relevant data to your interests. If you want to measure the success of a new advertisement campaign, make sure you allow enough time for the ads to reach customers before looking for a return on your investment. Ensure you use data from the same business cycle for each figure you want to calculate for the most consistent results.
3. Measure sales growth and marketing cost
Gather all the relevant data for revenue and expenses related to your marketing project. If you are calculating ROI for a large set of data, such as overall yearly marketing ROI for a company, you may collaborate with accountants, bookkeepers and other colleagues to determine an accurate calculation. For smaller projects, you may be able to simply add together invoices to determine overall marketing costs and resulting revenue. Write down your calculations in your marketing records to have clear, accurate information on what factors influenced the ROI.
4. Enter and interpret the values
Enter the data you collected in the appropriate formula and interpret what the resulting percentage means for the company. Average marketing ROI depends on the industry, advertising methods and many other factors, so it is important to do market research that puts your ROI into context. Typically, if a company can make five dollars in sales for every dollar spent on marketing, it has a good overall ROI.
Examples of ROI in marketing
You can practice calculating marketing ROIs by visualizing different scenarios before collecting specific data for your marketing project. Here are several examples of marketing ROIs you can use to help support your understanding of ROI in your workplace:
Positive marketing ROI
Bluetech Systems, a computer software company, made $5,000 in one month and spent only $1,000 on marketing and advertising costs. It determined an average baseline sales growth of 10% of their total earnings, meaning that $500 of that income wasn't influenced by marketing. The equation this company uses is:
ROI = ($5,000 - $500 - $1,000) / $1,000
This simplifies to an ROI of 3.5%.
Neutral marketing ROI
Sometimes, companies break even and have a marketing ROI equal to zero. If Wildflower Scentworks spent $200 on marketing in a month and made $200 in sales with no baseline of monthly growth, it could use the following equation:
$0 = ($200 - $200) / ($200)
The result equals zero and indicates no losses or gains.
When marketing costs exceed the overall revenue, a company has a negative marketing ROI and loses money through that campaign. If Barley Consulting spent $20,000 on marketing a company with 15% yearly sales growth, then made $15,000 that year, it has a negative ROI. To get the specific number, subtract 15% of the company's yearly earnings, $2,250, and the total marketing costs, $20,000, from its $15,000 earnings. This equals -$7,250, which you can then divide by $20,000, resulting in a marketing ROI of about -36%. Here's the equation you could use to determine the ROI:
Adjusted marketing ROI = ($15,000 - $2,250 - $20,000) / $20,000
Explore more articles
- 32 Ways To Invest in Yourself With Definitions and Examples
- 26 Ways To Start a Speech and Capture People's Attention
- 21 Fun Trust-Building Activities To Use With Your Team
- 28 Quotes About Loving Your Job
- How to Redline in Word (With Definition, Benefits and Steps)
- 14 Effective Problem-Solving Strategies
- Types of Operating Systems (With OS Functions and Examples)
- What To Expect During an Internship Interview (With Tips)
- 6 Ways To Streamline Business Processes and Workflows
- 3 Examples of Daily Routines (With Benefits and Tips)
- How To Write an Address: A Complete Guide
- How To Calculate P-Value in Excel Using Two Methods