Accountability and marketing ROI go hand in hand
Marketing ROI is becoming the number one metric for evaluating campaign success. And for good reason: Marketing spend is increasingly under pressure for greater accountability.
For this reason, campaign profitability analysis is essential. So is the need for optimization. ROI is often equated with profitability and traditionally stands for “Return on Investment”.
But if you search for the definition of marketing ROI on the Web, you’ll notice that we don’t all share a common view of what ROI actually looks like.
Not only that but the definition marketers might use may have nothing to do with one that your CFO has in mind. That’s why measuring ROI can become a source of friction and cast doubt on the true contribution of marketing to the bottom line.
Marketing ROI – a commonly-used definition
The definition of marketing ROI generally refers to gross ROI. It looks at total sales made as a result of a given campaign, compared to the total cost of the campaign (media, creative and other direct costs).
The formula is simple:
Total sales ÷ campaign costs = ROI.
ROI can be expressed as a percentage, or as a multiple. A campaign with sales of $ 1,000 and a cost $ 100, has an ROI of 10X or 1,000%.
$1000 ÷ $100 = 10X
A dollar revenue for a dollar in costs would have a 100% ROI or a 1X multiple. Nothing lost, nothing gained.
10X is not always good, and 1X is not always bad
It is important to put this metric into perpective. Depending on the nature of the campaign, a 1X yield may be excellent or crappy.
- For example, in the case of a customer acquisition campaign, the acquisition cost often exceeds the value of the first purchase. So, a neutral, or even a negative ROI is to be expected.
- In the case of a campaign sent to your most engaged customers, there’s something wrong if your ROI doesn’t reach 10X or even 50X.
But beware: sales do not equal profits
The challenge with this commonly-used definition is that it does not take into account the profit margin of the product sold. Most goods have a cost. The cost of raw materials, R & D, packaging, etc. should normally be taken into account in the Marketing ROI calculation.
For example, let’s say that a product that has a cost of 40% of the selling price. That’s 40 ¢ per dollar of sales. In that case, every dollar of sales actually only generates 60 ¢ in revenue. Therefore, a more accurate marketing ROI calculation should be based 60% off the sales amount.
So if we take this into account for the previous example:
Campaign creates $1,000 in sales Product cost is $400 The net revenue generated is $600 With a campaign cost of $100, the net ROI is now 600% or 6X (instead of 100% or 10X)
So, if the campaign results in $ 1 in sales per dollar invested, the Marketing ROI is negative. Once you subtract the cost of the product, the net revenue is only 60¢ and so you would lose 40¢ profit for each dollar in sales generated.
Sometimes Gross ROI serves us well
Even if it is not totally accurate, the calculation of gross ROI is often useful. It makes it possible to compare campaigns amongst each other, without having to calculate the profit margin of each product sold or determine a blended margin.
However, when campaign performance is marginal, a net ROI analysis allows us to make better decisions about resource allocation and serves to raise a red flag for campaigns that need to be optimized.
ROI and Effectiveness – Do You Truly Understand the Difference?