Marketing return-on-investment - what is ROI and how is it measured?

Marketing activities can make or break a small business. The way in which you market your firm is key to your success; well thought out, properly executed campaigns can help to ensure that your venture fulfils its potential, while poor or non-existent marketing can destroy any chance of success.

Many (but by no means all) firms understand the importance of marketing. But a surprisingly low number of small business efficiently measure the effectiveness and financial return on individual campaigns. If you are to ensure that your resources are used in the most efficient way, you must monitor your marketing spend against the success of each campaign.

What is marketing return-on-investment (ROI)?

First of all, it is important to note that the cost of marketing is not an expense – it is an investment. This is a vital distinction that is all too often ignored. Marketing is not an overhead like heating or stationery. When you spend money on marketing you are doing so in the hope that it will earn you money in the future.

If you were investing your money in an ISA, you would want to know the return you would get. Your return on investment (ROI) for marketing activities can be thought of in similar terms. It is expressed as a percentage figure, and tells you how much you have gained in profit in relation to the amount that you first invested.

Looking at your marketing ROI can help you in a number of ways. On the most fundamental level, it can help you judge the success of your efforts in comparison with other potential investments. For example, if your ROI is less than you would get in interest if you put the cash in the bank, you are doing something wrong. Once you have run a few campaigns, comparing ROIs can help you to track improvement and comparing the results of activities will help you identify which campaigns and tactics are best for your business.

How to work out marketing ROI

The basic formula for calculating your ROI is as follows:

ROI = ((Yield – Total investment value) ÷ Total investment value) x 100

A percentage value greater than 0 per cent means that you made a profit on your investment. But marketing ROI calculations can become very complex very quickly. For example, you might be running a campaign across several platforms, aiming to elicit a range of different responses. These responses might not all be a simple sale. This is where marketing ROI becomes very difficult to judge.

As a simple metric, marketing ROI comes into its own when you are running something like a direct mail campaign. Here the expenditure and the response are easy to quantify; your investment is the cost of the direct mail, and your yield is the value of each sale that arises from a response to your campaign. You can then tweak aspects of your campaign, and judge the impact of these changes by looking at their effect on your ROI.

What are the other measures of success?

Sometimes, marketing campaigns do not provide a yield that is measurable in pounds and pence. For example, you might be running a campaign intended solely to raise awareness of your firm, rather than to directly generate sales. In these cases a simple ROI calculation is unlikely to be the best measure of success.

The way in which you measure campaign success will depend on your desired response. For example, if you are running a pay-per-click campaign to drive traffic to your website, you would keep track of the number of clicks generated by your ads. You could then tweak an element of the campaign and see whether the number of clicks rises or falls.

In some cases it will be virtually impossible to accurately judge the success of a campaign. For example, if you are handing out product samples in the street you have no way of telling how many of the recipients will then go on to make a purchase as a result. You can, however, look at your general sales trends; if volume or turnover are dropping or remaining level, your marketing efforts are not working.

The key to marketing success

Careful monitoring is the key to success in marketing. The worst case scenario is that you do not keep track of any of your marketing metrics. The natural conclusion of that scenario is that resources are wasted and, ultimately, marketing budgets are cut as it is deemed to be a lost cause.

Even if you cannot measure your success down to the last penny, make sure that you keep as close an eye on your marketing yields as possible. This will help you to direct your resources more effectively – and to increase sales as a result.