Chapter 34: How to Calculate Marketing ROI
Remember that old saying about “I know half my marketing money is wasted. I just don’t know which half?” It, or words to that effect, have been attributed to so many marketing moguls I’ve given up trying to figure out who really said it.
As far as I’m concerned, it was Gandalf.
“I know half of marketing money is wasted. The trick is figuring out which half.” – Gandalf
Trouble is, Gandalf lived in a fantasy, agrarian culture. Wielder of the Flame of Anor he might have been, but he didn’t have access to 21st-century metrics and reporting tools.
Modern business owners can totally figure out which half of their marketing spend gets wasted because they know how to calculate their marketing ROI not only for their marketing department as a whole but for individual initiatives.
Here’s how to do that.
The basic formula for return on investment is (Return – Investment/Investment). For marketing, it becomes:
Gross Profit – Marketing Investment/ Marketing Investment
If Hector makes $120,000 per quarter with his courier business and spends $12,000 per quarter on marketing, his Marketing ROI is [($120,000 – $12,000)/$12,000)] 900%, or 9:1. If Sascha spends $5,000 per quarter to make her $50,000, then her Marketing ROI is [($50,000 – $5000)/$5000] also 9:1.
Okay. Got it?
If you’re still reading, that’s okay. Marketing ROI is almost always less clear and more confusing that I just suggested. Here are a few wrinkles that sometimes complicate each of the three pieces of the Marketing ROI formula:
Just taking your gross profit as I did in the example above doesn’t always work because your gross profit almost always includes income from customers you’ve already acquired and from customers who came in from referrals or other sources that don’t interact with your marketing. Using gross profit can give you an artificially high ROI using the simpler method.
Some alternatives to using gross profit include:
- Gross profit for new accounts
- Customer lifetime value (CLV)
The original formula can give an inflated value for marketing spend because marketing represents only one part of the expense of gaining and maintaining clients. As above, it also interacts poorly with the fact that not all revenue comes directly from marketing. A few alternative values to insert in this part of the equation:
- Marketing Investment plus cost of maintaining existing accounts
- Marketing Investment plus all costs of the marketing and sales departments
Which is best for you depends on too many factors to discuss here, but you should talk it over with your money managers, and you can talk about it with a marketing professional.
While you’re at it, remember that you can track and code different marketing initiatives, products, services, and departments to gather an ROI for each one and compare how they do. When you do that, it’s less important to nail down more detailed ways of assessing Marketing ROI – what matters in those cases is that you use a consistent method for assessing each, so you can compare them meaningfully. Nuanced Media is a premier Phoenix marketing agency, and our experts are always willing to answer your questions maximizing your ROI from your marketing investment.