What is Marketing ROI, and Why is it Difficult to Measure?

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Marketing ROI

One of the things that you need to do for a marketing campaign is to figure out the budget and the ROI on that spend, before you go pour money into it. Calculating this ROI needs you to take into account not just basic campaign revenue and the spend, but also several other variables and metrics that are different for each company and the kind of campaign that is being run. Calculating marketing ROI is therefore still more of a guessing game than an accurate science.

Formula For Calculating ROI

A simplistic way to calculate your return on investment as a percentage of your marketing budget is this:

ROI = (Revenue growth – Marketing budget)/Marketing budget

So if you had and spent $500 as your marketing budget this month, and the campaign generated $1,000 in revenue growth during the month, your return on this campaign is 100 percent.

But this makes the rather unrealistic assumption that this marketing spend and the revenue generated were a standalone event not linked to past efforts and not having any impact on future revenue.

What you need is historical data to set a base level of month-by-month revenue growth for at least a year. If your average revenue growth over the past 12 months is eight percent, then this eight percent has to be factored out of the current month’s revenue. Taking the example above, your ROI is now down to 92 percent.

So the formula changes a bit, like so:

ROI = (Revenue growth – Marketing budget)/Marketing budget – Avg. revenue growth

How About Churn?

You also need to take into account the churn factor. Whatever number of customers the campaign manages to convert is not going to be the final total. Every business has some churn, and this will reduce the total ROI as you expand the period further ahead after the spend and conversions happen. So how do you factor in churn? This is one of the biggest problems when it comes to calculating marketing ROI.

If you want to make this ROI formula for a marketing campaign even more accurate over the long term, try using the number of lead conversions and your average customer lifetime value (conversions x CLV) as your returns, instead of the immediate revenue growth. If you want to find out how to calculate your customer lifetime value, we have an LTV calculator for that.

Measuring ROI for SEO Campaigns

Another problem that marketing managers face is that the ROI of many campaigns doesn’t show up at all for 6-8 months, and may even end up in the books as sales revenue for subsequent years. For example, things such as branding and/or SEO campaigns typically go on over an extended period of 6-8 months (at least), and are also an ongoing effort. So sales revenue you get today’s search traffic may be the ROI of a marketing budget for the previous fiscal year.

Secondly, you may not even know what revenue you can attribute to which part of your SEO campaign, because it has so many different aspects. Let’s say you paid a web developer for doing onpage optimization to improve your website performance and page loading speed. You also allocated a budget for getting targeted traffic. Now your website traffic is suddenly converting a lot better. It’s fine if you can lump all of this under SEO. But if you mark them as separate campaigns, then you’re in trouble because you don’t know which one actually worked, or whether both should be credited for the increase in website lead generation and conversions.

Anyway, this is how you measure the marketing ROI of SEO. You have to come up with an anticipated ROI by going in reverse from your sales target to leads to website traffic. For example, if you plan to spend $5,000 on SEO, then you need to generate at least $5,000 in new sales from search traffic. Let’s say your product is priced at $100, and you have a 3% conversion rate.

Required number of new sales to generate $5,000 = 50

Required number of new visitors to generate 50 sales = 1,667

So now you know that you need at least 1,667 more website visitors in order to breakeven on this campaign. Once the campaign gets underway, you keep track of the number of conversions from it through Google Analytics or whatever other traffic analytics tool you are using. Update your spreadsheet regularly with the latest total sales revenue generated by your SEO campaign. At the end of the year, once the dust has settled on your SEO efforts and you’ve moved on to something else, you’ll still know exactly how much ROI it has generated.

For more information on these topics you can see our other blog posts below

Your Website Marketing Goals

Online Marketing Tools to Track Website Leads

Best Marketing Strategies to Stay Within Your Marketing Budget

By Zal Dastur

November 23rd, 2016

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