Marketing ROI: What is it and is it important?

What is ROI?

ROI stands for Return on Investment. The term is used in a variety of business scenarios and means slightly different things to different industries.  Essentially, in all situations, ROI is a key performance indicator (KPI) that is used to evaluate the efficiency of an investment.

So if it is related to investments (after all, investment is part of the name), how come marketers use the term, and what is ROI when it comes to marketing?

Although many small businesses don’t treat marketing as a commodity, it is actually considered an investment in your business.  In fact, many professionals believe that you should calculate what a business should re-invest in itself in terms of marketing as a percentage of the gross revenue that the business brings in.  The Small Business Administration indicates that small businesses with revenues of less than $5 million should allocate 7-8 percent of their revenues to marketing.

In addition to establishing a benchmark for a marketing budget, the SBA also defines two important things: what does marketing include? And how should your investment be spent?

Marketing expenses can be broken out into two general categories:

• Brand Awareness: This includes all the things that you might do to be sure that your company is top of mind, and available for people to seek it out when they have a need.  Things like building and maintaining websites, blogging, general SEO, maintaining a social media presence and even sales collateral and materials fall into this category. For many small businesses, sponsoring the local baseball team or non-profit event is a big part of their brand awareness, and should be considered part of the branding portion of their marketing budget.
• Promotions: Promotions are all those things that you do to ensure that push your products and services out to the general public. Direct Mail, email marketing, paid advertisements on social media, Pay Per Click advertising, print advertisements, etc. are all ways that businesses push their information out to the public.

The SBA guidance for small businesses is that your marketing budget should be split evenly between these categories.

Why is marketing ROI important?

Measuring marketing ROI is essential for all businesses, since it provides insights into the effectiveness of your marketing. Particularly now, when there are so many options competing for your marketing dollar, being able to evaluate each piece of your marketing independently to determine what it is contributing is absolutely critical.

Evaluating and monitoring ROI helps take the guesswork out of future marketing decisions.

Let’s say you brought in $200,000 in gross revenue last year.  Your marketing budget should be $14,000 and $16,000.  That’s a lot of money for a small business and many business owners might think that that is more than they can afford.  But the point of marketing, like any other investment, is that it should yield a return.  Unlike overhead expenses like a lease or insurance, marketing is supposed to give something back.  And ROI is the tool that you should be using to determine whether your marketing dollars are well spent or not.

In some cases, the ROI for your marketing may be difficult to define. You might wonder whether it is worthwhile to have a website (particularly if it gets little traffic), but it is something that you know you must have. And you may have a hard time seeing a return on from having your logo on the back of a little league t-shirt.  But all of these can and should be calculated, at least with an estimate. If you question the return, as you might in the case of the website with little to no traffic), you should try to determine how you can maximize that investment.  Explore what you can do to increase the return on that particular investment, so that it brings the return you want.

Looking at ROI in terms of investment also means that you are looking at it to provide returns over time.  You shouldn’t use ROI to evaluate the effectiveness of Facebook advertising based on the performance of a single Facebook ad. You should remain committed to the media long enough to determine its ROI over time. As with monetary investments, it’s important to have a wide range of types of marketing investments. Some will yield less than others, but are more consistent over time.  Others may take longer to see the return.  Having a diverse system in marketing is just as important as it is in the financial world.

How do you calculate ROI?

At first glance, it seems like it should be easy to calculate ROI.  Take the initial investment and divide whatever gains you made from it to come up with a percentage. Your gains are what you made after deducting the expense.  So if you spent $1000 on a direct mail campaign and got a sale for $1300, your ROI  formula would be ($1300-$1000)/$1000, or 30%.

Looking at ROI as a percentage rather than dollars earned will help you when you’re comparing two types of marketing which have significantly different costs.

Remember that, in addition to the hard costs and expenses associated with a marketing campaign, you should also take into consideration other factors, like time, time spent away from production, hidden fees, etc.

How do you use ROI?

Particularly in marketing, you can use ROI to compare the benefits of running different kinds of campaigns, or you can use it to invest more in a particular area to make it a more profitable marketing method for you (like in the case of an underperforming website).

By calculating your marketing ROI, you can learn things like:

• Where to spend future money: This is perhaps the most ibviosu insight you can gain from measuring actual results.  If you can determine which areas aren’t producing a sufficient ROI, you can better allocate future budgets to do what works for your business.
• How to adjust your marketing strategy: You can adjust your strategy according to what you see.  If you recognize that your focus on boosting social media isn’t directly bringing orders, but it is increasing your followers, you can calculate what the value of each follower is and/or adjust your strategy so that you can more directly evaluate impact.
• Which tools to use to help your marketing: If one particular tool or set of tools works well for you, you can feel confident in expanding your use of that tool and spending additional resources there in the future.

Measuring ROI can also be good for accountability and cost control.  If you know that direct mail typically pulls in about 30% ROI, and you see a campaign that brings in less, you can evaluate that specific campaign, looking at whether there were above average expenses, whether the piece itself was different, or whether there was an issue with the list or timing of the piece.  Regardless, once the campaign is done, you will get a true sense of its value and what you can do differently next time.

The bottom line is that although measuring marketing ROI may not seem easy, it is imperative in order to set goals and evaluate performance.  Measuring ROI is one of the things that we do with our clients to ensure that we are on the same page with them at the outset of a campaign, and is also a tool to share results.  Most professional marketing companies should do some ROI analysis for every piece of work they do for you!

Want to take the guesswork out of your next marketing campaign? Call us at (509)842-0782 or send us an email at [email protected].