Measuring Marketing ROI: Understanding Its Impact

In business, investment is crucial, however; the bottom line is this: before putting money into something, you must ensure it's worth it. That's true for every strategy you choose.

Every company aims to maximize the value of its expenditures. In the field of marketing, where you're confronted with a multitude of options, the real challenge lies in determining which strategies deliver the most significant returns on your investment.

For instance, when contemplating a substantial investment in advertising, the ability to track its success through meaningful metrics becomes crucial. If you're on this journey and wish to enhance your skills in measuring the effectiveness of your investments, this blog will provide you with the foundational knowledge to assess the worth of your marketing efforts.  ‍

Introduction to ROI and KPI’s

The terms ROI and KPI’s might sound technical, but they are fundamental tools that play an important role in decision-making and performance evaluation for businesses of all sizes and industries. Let’s dive deep into what they mean!

What is ROI?

In a recent blog, we talked about how ROI (Return of Investment) can be understood with a single question: "Is what I'm investing worth it, and am I getting my money's worth?"

ROI is the money an investor in a business earns for the injection of financial capital. Any return is from the net profit the business makes and is a mark of the efficiency of investing capital in the venture.

But here's where it gets interesting. ROI doesn't exist by itself.  To truly understand the value of your investments, you need to look beyond the surface. This is where KPIs (Key Performance Indicators) come into play.  

What is a KPI?

According to Qlik, KPI stands for key performance indicator, a quantifiable measure of performance over time for a specific objective. KPIs provide targets for teams to shoot for, milestones to gauge progress, and insights that help people across the organization make better decisions.  

What is the difference between ROI and KPIS?

Think of KPIs as the compass that helps you navigate the ROI landscape without getting overwhelmed. They are the strategic metrics that provide valuable insights into the performance and health of your investments.

In simpler terms, while ROI answers the question of whether your investment is profitable, KPIs help you understand why it's profitable and where there might be room for improvement.  

KPI’s help every area of business move forward at the strategic level, and among the KPI’s, we can find ROI, as one of the metrics that matter the most.

ROI In Marketing: How to Understand It?

In research by Wix, it was found that the origins of Marketing ROI dates to the 1950s when companies started to develop various methods of measuring the effectiveness of their marketing campaigns. As new technologies emerged in the 1960s, companies began tracking their customers' buying habits, which allowed them to develop more accurate measures of their ROI from their marketing efforts.

Over the years, the concept Marketing ROI concept expanded to encompass a diverse range of performance metrics, including but not limited to metrics such as cost per lead, cost per acquisition, customer lifetime value, and many others. These metrics empower businesses to pinpoint their most lucrative channels and campaigns, enabling them to fine-tune and enhance their marketing strategies accordingly.

How To Calculate Marketing ROI?

While there exist various methods for calculating marketing ROI, the fundamental formula used to gauge the impact of marketing efforts is relatively straightforward:

(Marketing Cost - Sales Growth) / Marketing Cost = Marketing ROI

However, it's crucial to acknowledge that this formula operates under the assumption that all sales growth is solely attributable to marketing endeavors. To present a more realistic assessment of marketing impact and ROI, it's advisable for marketers to also factor in organic sales.

(Marketing Cost - Sales Growth - Organic Sales Growth) / Marketing Cost = Marketing ROI

When employing marketing ROI formulas, it's essential to comprehend the comprehensive ROI generated by marketing activities. Let's delve into key elements to incorporate into your marketing ROI calculations:

• Total Revenue: Assessing the overall revenue generated from a specific campaign provides marketers with a comprehensive overview of their efforts. Factoring in total revenue in marketing ROI measurement aids in strategic media planning, budget allocation, and understanding the overall impact of marketing.
• Gross Profit: Including gross profit in the equation allows marketers to grasp how marketing efforts contribute to revenue in relation to the cost of producing or delivering goods and services. To incorporate this, marketers can use the following formula: = (Total revenue - cost of goods required for product delivery).

• Net Profit: Going a step further, marketers can gauge the influence of their marketing endeavors on net profit by adding the following to their formula: = (Gross profit - additional expenses).

Having a clear understanding of these components ensures that your marketing ROI assessments are comprehensive and aligned with your team's specific goals and strategies

Benefits of ROI for your Marketing Planning

• ROI will help you make data-driven decisions and create more accurate projections for your future marketing campaigns.  
• ROI can help you identify if you need to change your marketing strategy; by measuring the results in terms of ROI, you can get a clearer idea if the channels and actions chosen were the right ones or if you should re-evaluate these choices.
• The ROI will give you more confidence in the results you can expect in your future campaigns. You will no longer have to roll the dice and hope that luck will be with you, giving you more credibility with your consumers and allies.
  

Need Help to Measure the ROI of Your Digital Efforts?

ROI is just one of the many metrics that exist to obtain excellent results and are applied to every action and stage of your digital strategy. At Lean Marketing we are here to help you understand the metrics that matter!  

Part of our services is to see and analyze results through complete reports explained in your own words and needs.  Our team is ready to define meaningful KPIs for better decision-making. Contact us!