With all of your paid digital marketing activities, you should always be able to determine a return on your investment. Uncovering these costs can help you establish what is and what isn’t supporting the wider success of your business.
Determining what is drawing in profit and revenue can help shape your decision-making going forward as well as support you to achieve crucial stakeholder buy-in. Calculating your return on investment can be tricky at times but at its most basic level, it’s good to get an understanding of how much money you’ve spent compared to the revenue generated.
What is ROI?
ROI or Return on Investment helps businesses understand whether they have made a financial gain, loss, or broke-even. Whilst these investments are commonly associated with finance it’s important to consider other resources used such as time. ROI is used throughout all elements within the business world and although you may not be personally responsible for your company’s spending, as a marketer you need to have a good understanding of your department’s budget and spending.
The Importance Of ROI
Having the ability to determine if an investment will generate a positive return for your business will enable you to make decisions that might have been tricky without foresight. Carrying out actions that positively impact your business from a financial perspective will help you grow your business.
As a marketer, you know that within our role we do a lot of testing and trialling, but allocating budgets to specific channels across your marketing mix can be tricky. By gaining a strong understanding of your return on investment you’ll be able to improve your marketing distribution based upon cold, hard results. Learning which campaign initiatives have earned funding will ensure you drive optimal revenue for your business.
Additionally, as marketers, we’re not exempt from internal pressures, particularly when it comes to spending. If you’re looking to increase your marketing budget or allocation, then you’ll need to be able to put some justification behind this. By exhibiting the positive financial impact your marketing has on the business then you’ll increase the likelihood of buy-in from key stakeholders like your managers or directors.
With the market changes and fluctuations we’ve seen because of the Covid-19 pandemic, companies are quick to reserve cash flow to ensure the sustainability of the business. It’s unfortunate, but marketing departments are often the ones that have their budgets cut the quickest. With the ability to demonstrate how your efforts make a positive return on the business you’ll increase your chance of maintaining, and potentially increasing your budget.
How To Calculate A Marketing ROI
In short, a return on investment is calculated using two key metrics: the cost to do something and then what money is generated as a result.
This is a simple way to integrate your ROI with the overall business line calculation. The formula should look something like this:
Sales Growth – Marketing Cost/Marketing Cost = X x 100 = ROI
Although this formula is simple to piece together, it assumes that your sales growth is directly attributable to your marketing efforts. Some businesses may establish the desired threshold for ROI.
To obtain a more analytical and accurate representation of your ROI, your formula will change depending on how you measure the impact of your activities as well as your costs. We as marketers are familiar with the struggle of selecting appropriate attribution models and then deciphering which marketing activity has contributed to a sale or a conversion. In general, the larger the business, the more complicated and convoluted these formulas may become due to a number of variables.
Customer Lifetime Value
Marketers such as yourself can also calculate your return through Customer Lifetime Value or CLV. This explores the value of each individual customer for your business. Calculating your CLV helps you determine the long-term ROI throughout the average buyer lifecycle, whilst this isn’t concrete evidence, it can support you to forecast your results. The two formulas are pretty straightforward but will vary depending on your business model and whether you provide services or products:
Average Purchase Value X Average Purchase Frequency (Monthly, Annum) = CV
Average Customer Lifespan
Sum of Customer Lifespans/Number of Customers = ACL
Now we’re ready to calculate the Customer Lifetime Value:
Customer Value (CV) X Average Customer Lifespan (ACL) = CLV
Customer Acquisition Cost
Depending on how you have configured your marketing plans there’ll likely be several different costs involved in successfully acquiring new customers. Within most businesses, you’ll likely need cooperation between your marketing and sales teams to successfully close sales.
Customer acquisition costs should include salaries, ad spend, and other expenses you’ve made including outsourcing some marketing activities. Try to total these costs as accurately as possible and then divide them by the total number of customers you’ve acquired over a set period of time, such as monthly, quarterly, or annually. This formula is as follows:
CAC = Total Marketing & Sales Spend/No. of New Customers
Now that you have calculated both your customer lifetime value and your customer acquisition costs you can now produce a more accurate and comprehensive look at your ROI using the formula below:
ROI% = Lifetime Value – Customer Acquisition Cost/Customer Acquisition Cost X100
What Is A Good ROI?
Generally, many marketers typically use the 5:1 ratio, a positive but somewhat average result. At a minimum, you should cover the cost of providing the product or service and marketing it. Something like 10:1 is considered high value and an exceptional result. When we look at the lower end of the scale, like a 2:1 ratio, this is normally considered non-profitable as it likely means the cost of delivering the service or goods will mean the business just about breaks even with their spend and returns.
However, every organisation is different. There are still a number of variables that should be evaluated depending on your business including but not exclusive to the following:
- Media Buys
- Employee Costs
Increasing Your ROI With Loop Digital
At Loop Digital we’re guided by our marketing expertise and our core values but alongside this, we’re passionate about helping businesses grow. Every plan and strategy that we craft is formulated in a way that places emphasis on maximising your return on investment. If you’re interested in taking your digital marketing to the next level, get in touch with our team today.