ROI stands for return on investment or return on marketing investment. It is also called MROI or ROMI sometimes, both ‘M’s standing for ‘marketing’. It refers to the profit you make from your marketing investment. A high ROI implies good marketing investment where the money invested proved to have been well spent. A low ROI indicates the necessity to change the marketing strategy whether it is impact marketing or content marketing strategy because it is not working and the money spent in the current marketing strategy is not bringing any positive result.
Now you know the answer to “What is ROI in marketing?” This is the question you began with, but now there are way too many new questions in mind. What counts as a low ROI? What counts as an acceptable ROI? What is a very good ROI? How to even measure it? You will learn all about it in this article.
Revenue to Cost Ratio
The ROI value is calculated on the basis of the Revenue to Cost ratio. The higher the ratio the better the ROI, because the Revenue generated stands for the return and the Cost stands for the investment. This ratio is calculated according to every dollar spent in the marketing.
If you spent $200 on your current marketing investment and total CP, and the revenue that you started generating after it shows a net profit of $800, your revenue to cost ratio will be 800/200=4/1 or 4:1. This is your ROI for this marketing investment.
Why is the ratio system used?
The ratio system is used because it is the simplest way to measure the ROI or the result of a marketing investment as there is no unit involved. There is no conversion required.
How to Calculate ROI
To calculate ROI you need to calculate the Marketing Cost and the Net Profit. Marketing cost is the additional cost that goes into the marketing campaign.
In today’s marketing scenario, following costing modes are considered while calculating ROI:
- Ad Clicks
- Media expenditure
- Production cost of the content
- Marketing agency cost
Whichever set of techniques you implement for the marketing, collectively counts as the marketing investment cost. The return is the net profit that remains after deducting the amount of total investment.
In short, ROI= (Revenue-Cost)/Cost
So, this is the mathematical answer to “what is ROI in marketing?”
This was the simple calculation. But things don’t work that way. More often than not, marketing campaigns kick off way after they are done, and the revenue generated is the result of the combination of multiple investments. Like considering an average of over a year or a three-year period gives a better result. So, the calculation seems to be simple but involves too many other factors.
The Error Factor in Calculation
Even with the marketing ROI formula, calculating the actual ROI is not very easy. There are some factors that could be left out.
- When we are considering the cost of the marketing investment or the campaign, we are only considering the cost after the targeting has been done or redone, the social media platform expenses, the stray ads, none of it is included in the cost of the marketing campaign.
- Trial and error expenditure when you have tried a marketing campaign on a small term or published an ad to gauge the traffic engagement.
Marketing does not exactly work that simply. A marketing campaign that ended years back can become more relevant in the future though it looked like a failure during its own time. A simple ad recalling the campaign can make things go viral and make the campaign finally pay off. In this case, what do you consider to be the investment? That one ad or the ad and the entire old marketing campaign?
Measuring marketing ROI accurately involves keeping a track of every expenditure and revenue. Even if you got very small revenue out of a trial campaign, or got closer to a more focused target demographic with a survey ad, it is good to consider that factor in it.
It is the cumulative investment of campaigns, the one that brought the right people to you, and the one that made them make the actual purchase, that needs to be considered.
Benefits of MROI
The measurement of return on marketing investment helps the company owners and financial heads by providing several benefits.
- It keeps a track of their investments.
- It helps in objectively deciding how helpful a certain investment was or was not.
- It also helps in analysing the competency of each marketing strategy in a given scenario.
- It helps in figuring out what kind of marketing works with a certain demographic.
- ROI also gives an accurate idea of where you stand in the marketing world compared to your rivals in the industry.
Now we know everything about “what is ROI in marketing”. When you find anybody asking that question, you will finally be able to participate in the conversation than just sitting and being confused. But talking about it is not why you learned about ROI. You need to implement it. Combine it with lead generation campaigns and ads to multiply the revenue. Generate more leads and get them to actual conversion with the perfect mix of marketing and lead generation campaigns. It will take a while to figure it out but you can do it.