When businesses invest in marketing, they expect that investment to pay off in sales. This is true whether they are investing in direct marketing such as Google Search Ads, or brand marketing like out of home ads or sponsored events. Ultimately, the goal is for the investment to turn into sales.
Measuring the amount of sales growth that marketing investment has driven is known as a business’s marketing return on investment (ROI). Understanding your business’s marketing ROI is key to sustained profit and revenue growth.
What is marketing ROI?
Marketing ROI is the amount of sales your marketing efforts drive minus the associated costs. It is used as a key performance indicator (KPI), for marketing teams and represents a high-level view of marketing success.
How to measure marketing ROI
There are multiple ways to measure marketing ROI. One of the most commonly used formulas to calculate marketing ROI is:
Increased Sales – Marketing Spend / Marketing Spend = Marketing ROI
For example, if you get $50,000 in sales from $10,000 in marketing spend, the marketing ROI would be:
$50,000 – $10,000 / $10,000 = 4
Depending on your preference, you can also express the marketing ROI as a percentage by multiplying by 100. The marketing return on investment would then be 400%
You can calculate this for a single marketing campaign or for a marketing mix as a whole. The numbers are typically pulled from accounting software or sales reports.
A marketing ROI of “4” (or 400%) means your campaign generated four times as much revenue as it cost. By comparison, an ROI of “0” (or 0%) would mean your generated sales equaled your spend, resulting in no profit (but no loss either). Generally, marketers aim to have an ROI of 0% or greater on their campaigns, with an ROI of 500% or more being exceptional. However, there are many considerations in what a good ROI is for your business.
It’s worth noting: Some advertising platforms report on return on ad spend (ROAS) with a slightly different calculation:
Increased Sales / Marketing Spend = ROAS
This simplified formula can be helpful for quick campaign comparison within the advertising platform, but when marketers are evaluating overall return on investment, they will use this formula instead:
Increased Sales – Marketing Spend / Marketing Spend = Marketing ROI
Why can marketing ROI be difficult to measure?
When calculating your marketing ROI, there are assumptions to consider based on this formula:
Increased Sales – Marketing Spend / Marketing Spend = Marketing ROI
Here’s a closer look:
Increased sales
Not all of a business’s sales are driven by marketing. Some sales come from repeat customers who would’ve purchased anyway, while others are through salespeople or customer referrals. To calculate increased sales from marketing, you will need a way to attribute your increased sales to your marketing. There are a few ways to do this:
- Direct marketing. Direct marketing is any marketing that directly asks people to buy a product or service. Examples include digital advertising, direct mail, and email. You can attribute increased sales to the use of coupon codes or digital cookie tracking, although these methods may underreport ROI, since not every customer who sees your campaign will accept or use these strategies.
- Brand marketing. With this type of marketing, you are building a relationship between consumers and your brand to help influence future purchase behavior and increase customer loyalty and sales. Brand marketing applies to campaigns such as sponsored content and TV advertising. You can attribute increased sales to brand marketing by measuring sales before and after a marketing campaign, which can be windows of a week, month, or quarter, for example, depending on the campaign—but this is an approximation.
- Multichannel marketing. Multichannel marketing is a strategy that uses a combination of channels such as social media, email, and website promotion to increase a consumer’s opportunity to buy. You can attribute increased sales to multichannel marketing by using your CRM (customer relationship management) data to categorize sales by new customers and existing customers—and concentrating on sales from the former.
Marketing spend
Marketing spend is the amount of money spent on marketing initiatives. When calculating marketing costs, it’s important to be honest about the true cost of a marketing campaign. A common example that illustrates this consideration is a social media advertising campaign.
If a brand’s ad spend on Instagram ads is $10,000 and the return is $40,000 in revenue, the assumption might be that the marketing spend is $10,000 and the marketing ROI is 3 ($30,000 / $10,000). However, there are often other marketing expenses associated with Instagram ads, such as the production of the ads’ creative development and management of the campaign’s performance and optimization by either staff or an agency.
A true marketing ROI calculation considers this full scope of cost. Even if you are managing the campaigns and writing the copy yourself, it’s best practice to consider the cost value of your time. Even if you don’t pay yourself by the hour, you can use an assumed market rate for your time to estimate that cost.
Marketing ROI
Once your business has considered its increased sales and spend assumptions, the ROI calculation is pretty straightforward. However, what can be less clear is understanding what a good ROI is for your business.
An acceptable marketing ROI will differ from business to business. For example, retail, ecommerce, and consumer goods tend to have the highest email marketing ROI. Generally, business owners want their marketing ROI to be profitable (greater than 0), meaning the profit from their marketing’s increased sales is greater than their cost. But some businesses will accept an unprofitable ROI if their goal is to grow as fast as possible. Ultimately, the right target marketing ROI is the one that aligns with your business’s expectations and forecasts.
Why measure marketing ROI?
Measuring your marketing ROI will provide insight into which campaigns are performing best and whether your marketing efforts are improving or deteriorating. Measuring marketing ROI also provides the following benefits:
- Decision-making about your marketing budget. You can compare the marketing ROI of each of your marketing campaigns to understand where to invest further. Higher ROI marketing campaigns tend to be a better investment.
- Overall marketing performance. All else equal, if your business’s marketing ROI is improving, that suggests your marketing is increasingly effective.
- Assumption considerations. By going through the exercise of considering how you attribute increased sales and calculate true costs, you will give your business more clarity on its overall performance.
How to improve marketing ROI
Once you’ve measured your marketing ROI, there are three steps you can take to improve your returns over time:
1. Scale winners
In any marketing strategy, some elements perform better than others. The first step is to identify what’s working best within existing campaigns and invest more in those areas.
For example, if your main marketing channel is social media advertising, you may find that a specific audience, such as a first-party/lookalike audience with similar shared characteristics as your current audience, performs best. The most likely path to improve ROI is to spend more on that audience while spending less on others. Some digital advertising platforms give advertisers the option to automatically optimize toward high-performing audiences.
2. Run tests
One of the best ways to unlock improved marketing ROI is to test new strategies and tactics. These tests won’t always pay off, but when they do, they can lead to improvements.
For example, if your main marketing channel is paid search, you may test expanding into organic search engine optimization (SEO). If this new channel proves to have a high ROI, it will improve your overall ROI while improving sales.
3. Improve attribution
If unsure whether you’re ready to scale your winners or run additional tests, you may have an attribution problem. This refers to your ability to understand the extent to which your marketing efforts drove sales.
When many marketers hear “attribution,” they think of web analytics and their cookie/pixel tracking. This is certainly part of it.
But understanding attribution is more than just a technical challenge. It’s strategic, too. Businesses can improve their attribution by gaining a deeper understanding of the customer lifetime value of each new customer their marketing acquires and what percentage of new sales were due to organic word of mouth or other non-marketing factors.
Marketing ROI FAQ
What is a good ROI for marketing?
A good marketing ROI will differ for each business, depending on growth goals and profit margins. However, generally, a marketing ROI above 2 is considered acceptable, and above 5 is considered excellent.
Does a higher ROI always mean a more successful marketing campaign?
Ideally, yes, a higher ROI would always mean a more successful marketing campaign. However, businesses have imperfect information, so marketing ROI should be considered alongside other goals and assumptions about what is measurable. For example, a Google Search Ads campaign might report an ROI of 8 for a brand, whereas a sponsored event by the brand might lead to few new direct sales, reporting a negative ROI. However, the sponsored event may have grown awareness, brand love, and brand interest in a way that the search ads couldn’t. In fact, some of the customers who purchased after clicking a search ad may have searched for the brand due to the brand-building effect of the sponsored event.
Can businesses calculate ROI for all of their marketing channels?
Yes, businesses can always calculate ROI for any marketing channel or campaign. This includes everything from radio ads to email marketing. However, some channels are easier to measure than others. Digital advertising is the easiest to measure because you can track it via cookies and automated, real-time digital reporting. Businesses can still track traditional marketing techniques but in a different way; they typically rely on before/after tests or brand lift studies.
