Why Do I Need To Understand ROI?
Without a website and marketing plan analysis there is absolutely no way to tell if your website and marketing plan are giving you the best possible ROI. By focusing on ROI, you can help your company move away from the idea that marketing is a fluffy expense that can be cut when times get tough.
The components for calculating marketing ROI can be different for each organization, but with solid ROI calculations, you can focus on campaigns that deliver the greatest return.
For example, if one campaign generates a 15% ROI and the other 150%, where will you invest your marketing budget next time? Equally, if your entire marketing budget only returns 4% and the stock market returns 8%, your company can earn more profit by investing in the stock market.
Understanding The ROMI Formula Is Essential If You Need To
- Produce the best possible results with your marketing investments
- Improve marketing ROMI
- Optimize marketing spend
- Maximize promotion effectiveness
- Maximize channel effectiveness
- Drive marketing accountability
- Support business planning
- Justify marketing investments in tough times when companies slash their marketing budgets
- Justify a pay rise
ROI vs ROMI
Return on investment (ROI) is a measure of the profit earned from each investment. It’s typically expressed as a percentage, so multiple your result by 100. In simple terms, the calculation is:
(Return – Investment) x 100 = _ %
ROI calculations for marketing campaigns (Return On Marketing Investment) can be complex — you may have many variables on both the profit (return) side and the investment (cost) side.
The tricky part is determining what constitutes your “return,” and what is your true investment. For example, different marketers might consider the following for return:
- Total revenue generated for a campaign (the top line sales generated from the campaign)
- Gross profit, or a gross profit estimate, which is revenue minus the cost of goods to produce/deliver a product or service. Many organisations simply use the company’s COG percentage (30%) and deduct it from the total revenue.
- Net profit, which is gross profit minus expenses.
On the investment side, it’s easy for marketers to input the media costs as the investment. Other costs incurred to execute your campaign you should include:
- Creative costs
- Distribution costs (such as PAYG email credits)
- Printing costs
- Technical costs (such as email platforms, website coding, hosting etc)
- Management time
- Cost of sales
3 Common And Proven ROMI Formulas:
- Use gross profit for units sold in the campaign and the marketing investment for the campaign
Gross Profit – Marketing/Investment Marketing Investment
- Use Customer Lifetime Value (CLV) instead of Gross Profit. CLV is a measure of the profit generated by a single customer or set of customers over their lifetime with your company
Customer Lifetime Value – Marketing Investment/ Marketing Investment
- Profit – Marketing Investment – *Overhead Allocation – *Incremental Expenses/ Marketing Investment
*These expenses are typically tracked in overheads ( Sales and General Expenses)