As the world of marketing continues to advance and change, many eyes are on ROI and its value to marketing. For Greg Dvorken from Return, ROI is incredibly important. “It’s something I’ve been chasing my entire career and trying to figure out how we connect the successes of the marketing sides of things to business outcomes.” However, while so many marketers throw the term around, it can be easy to forget it’s not common knowledge outside of the experienced marketing sphere. So for those unfamiliar with ROI, here is a simple breakdown of what ROI is, how to calculate it and why it matters.
ROI is the practice of attributing profit and revenue growth to the impact of marketing initiatives. ROI helps companies understand how to measure their marketing efforts whether holistically, or on a campaign-basis, contribute to revenue growth. It helps justify your marketing spend, distribute budgets and measure campaign success. All in all, calculating ROI is key to properly understanding and analyzing your marketing strategy.
There are several ways to calculate ROI however the core formula is straightforward: (Sales Growth – Marketing Cost) / Marketing Cost = Marketing ROI. However it is important for marketers to also consider organic sales, therefore a more realistic formula is: (Sales Growth – Organic Sales Growth – Marketing Cost) / Marketing Cost = Marketing ROI. A successful ROI will sit around a 5:1 ratio, with exceptional ROI being considered at around a 10:1 ratio. You don’t want your ROI to fall beneath a 2:1 ratio as that means that your company’s costs to produce and distribute will break even with your spends and returns. Using these formulas will help marketers gain more insight on their strategies and lead to more accurate and effective campaigns!