In trade and business, every person or organization that invests in any field expects a return on investment according to the amount of money they spend. For example, when a film production company produces a movie, in exchange for the cost it does, they expect a return on the expenses and even profit through its sale. This example introduces the concept of ROI. Any business’s online and traditional managers are looking to get the most profit with the lowest cost. The rate of return on investment is a practical concept and measure to help managers to achieve this goal.
In this article on smart strategy, we will discuss the concept of ROI. What is ROI? How to use the concept of ROI in marketing. How to calculate ROI, and the challenges of measuring marketing ROI.
What is ROI?
A straightforward definition of the rate of return on investment is the income and profit from investment and expenses in a specific area. ROI introduces the degree of success from the asset or the degree of reaching the business goals.
Of course, the point that should be kept in mind when calculating ROI is that every investment does not necessarily have a financial profit, and the goal of a business manager’s investment may be something other than economic profit. For example, managers who organize celebrations among their personnel seek to increase their employees’ satisfaction with work efficiency, and financial criteria cannot measure this issue.
Calculating ROI in marketing helps managers properly evaluate the effectiveness of their marketing activities and channels.
The following are the reasons for the importance of ROI in marketing:
- Using the ROI, you can evaluate the efficiency and effectiveness of different marketing channels and, while identifying more profitable channels, increase the investment in them and reduce the cost of marketing channels with less efficiency.
- By calculating ROI, you can focus on the crucial criteria for a business and avoid wasting money and time on other less critical aspects.
How to calculate the rate of return on investment
In this section, we will talk about how to calculate ROI.
Identify key performance indicators or KPIs.
The first and most vital step to calculating ROI is identifying the key performance indicators and the main criteria for evaluating the success rate. For example, for a business that operates in the field of online book sales and to increase sales, the increase in online sales is one of the main criteria for the success of its advertising campaign.
The criteria you choose to evaluate your performance depends on your goals, plans, and other matters. However, if you do not effectively specify the KPIs, you will be unable to evaluate your performance effectively.
Some of the criteria that can be used to assess business performance are:
1. The cost of lead nurturing
One of the criteria for evaluating the success of a business is the average cost to create leads or the conversion rate of each lead. The cost of lead nurturing can use to calculate the average cost of acquiring each new customer.
2. The cost of acquiring a new customer
The cost per acquisition of a new customer or CPA is a very suitable measure to check the success of businesses in marketing, which determines how much you have to spend on average to attract each new customer.
To reach profitability, you can implement growth marketing by identifying the minimum cost of acquiring a new customer.
3. Customer Lifetime Value
Customer lifetime value is the total amount of purchases you can expect from a customer during their lifetime of buying from you. Based on this criterion, there is no need for heavy initial purchases from customers to increase profitability. Instead, the primary measure is the number of customers’ purchases in the long term.
4. Marketing cost
One of the main criteria to check the success rate of a business in marketing is to check the cost of marketing. This cost includes all items for online or traditional marketing. The marketing effectiveness can be evaluated by identifying each channel’s marketing cost.
5. Exchange rate
The conversion rate is the rate of conversion of target contacts into loyal business customers, which is one of the main criteria for evaluating the success of marketing activities. The higher the conversion rate of a business, the higher its sales and profitability.
6. marketing attribution
Marketing attribution is identifying customer touch points and assigning value to them. Marketing attribution means identifying the contact points from the first stage, the attraction of the target audience, to the last step, the purchase, and the most effective contact points.
7. Brand Reputation
Brand reputation represents the feelings and views of the audience and the target community towards a brand. Therefore, businesses with a positive mentality toward their brand are more capable of attracting customers. Therefore, proper branding and a positive attitude towards a brand can significantly benefit a business. In the long run, positive branding can substantially increase the profit of that business.
Challenges of measuring marketing ROI
In general, there is a straightforward and practical formula for calculating ROI:
[(income generated – marketing cost) / marketing cost ] * 100
Calculating the ROI rate is more complicated, and you will face different challenges while calculating the ROI rate. One of the main challenges to measuring ROI is the impossibility of calculating the amount of income in a certain period. For example, if a business implements a marketing strategy in a period and, after some time, according to the analysis, concludes that they should make changes in their marketing strategy. Then, the income obtained only by making changes cannot be calculated.
Therefore, for the approximate calculation of the effectiveness of the marketing process, a certain period must be considered.
Another challenge you face when measuring ROI is determining the main criteria of business income. For example, you may encounter the following questions at this stage.
- Do you consider the business’s gross income in the calculations or track the net income?
- How can you calculate how much revenue a campaign, channel, or touchpoint has generated for the business?
- What is the impact of marketing on the audience’s awareness, which is a non-numerical measure?
- Many advertising campaigns run for a specific time. For example, in a few months, it is only possible to calculate the return rate on investment once this advertising campaign’s stages are completed.
As you can see, calculating the amount of ROI can have different challenges, and marketers offer different formulas to measure it. For example, the HubSpot site provides the following formula:
[((number of leads x rate of lead to customer x average selling price) – cost of advertising) ÷ cost of advertising] x 100
When calculating marketing ROI, you must decide which metrics are most important to your business.
Best practices for measuring marketing ROI
Considering the challenges and complexities of calculating the rate of return on investment, we will introduce the best methods and tips for calculating ROI in this section.
1. Follow the appropriate criteria.
The first step to calculating ROI is determining the main value-creating criteria for the business. For example, the main goal of a company from spending on marketing and advertising is to increase the number of followers on social networks, or its major goal is to generate new leads, representing two different criteria for evaluating the business’s success.
2. Understand Attribution Models
To calculate the rate of return on investment, you must correctly understand citation models to identify the contact points that impact customers most and attract the most contacts.
3. Collect data
After identifying essential criteria and understanding attribution models, you should start collecting data. For example, if you want to check the effectiveness of your PPC marketing strategy, you should collect data on the number of clicks, leads, and conversions.
4. Evaluating marketing performance in the short and long term
You have to be patient to review and evaluate a marketing strategy and consider long-term benefits in addition to calculating ROI in a short time. Some advertising strategies may be successful in the short term, but others may require time. For example, SEO is a long-term marketing strategy that cannot be expected to yield much in the short term.
5. Calculate all marketing costs
When calculating ROI, you need to include all marketing costs. For example, suppose you are running a lead generation campaign on Facebook. In that case, you need to consider not only the costs of advertising but also the costs of the executive team and the creative development of the ads.
In this article on smart strategy blog, we examined and introduced the concept of return on investment, or ROI, which you can use to evaluate the performance and effectiveness of a business in the field of marketing or any other field in a purposeful way. In addition, the formula for calculating this We explained the valuable criterion, the challenges of its calculation, and the most important methods of improving the rate of return on investment. We hope this content was helpful to you.