Marketing is not an exact science or a fine art. It is a blend of creativity and business know how. Marketing software packages and extensions are so helpful in gathering data and finding trends along with many, many other features. That said, the best marketers know what these figures actually mean, and ROI (Return on Investment) is one of them.
Although it can be difficult or slightly unreliable to calculate the exact motivation for customers' purchases, it makes for really effective marketing when you learn from past experiences. Especially those that are backed up with facts and figures to boost your company’s profits.
So, let’s take the guesswork out of marketing and get started with ROI!
What is ROI?
ROI, or Return on Investment, is how we measure the profit made from each investment. In every campaign you decide to undertake, it’s important to ask what the ROI will be. Throwing revenue at marketing without monitoring its effects is like rowing with one oar: you're going to go round in circles. You need to be catching what's happening in your campaigns and making sure that they're doing what they're supposed to do; which is to generate revenue!
Remember: marketing is an investment, not a cost
The easiest way to calculate ROI in modern marketing campaigns is in a ratio format. And aim for a ration of 5:1. So, if you invest $100 in an affiliation programme, for example, and it yields $500 in sales - you're onto a winner. Of course, anything other than that is the cherry on top!
Why would you need to calculate it?
You’ll never have a full picture of what does and doesn’t work in your marketing schemes without calculating the ROI on campaigns. It allows your company to set achievable marketing goals and realistic budgets.
Calculating the ROI gives you an awareness of the different ingredients and how they react so you can make the perfect recipe for marketing success. It makes you more agile and you can quickly see that you should push forward or change tactics.
What factors do you need to consider when calculating your ROI?
Customer Acquisition Cost
CAC is the amount of money used to generate a single sale. A simple example would be investing in a Youtube ad that costs you $2000 and leads to 200 sales. In this case, the CAC would be $10.
However, things can sometimes get complicated when trying to figure out which campaign was responsible for a sale. It may have been a word of mouth customer or other scenarios not directly related to a specific campaign. Two particularly good SaaS that provide solutions for this are Facebook Ads if you're using Instagram or Facebook, and the Adwords Conversion Tag for Google Adwords.
Make sure you do calculate your CAC because we’ll be using it later to figure out the ROI.
Customer Lifetime Value
This is a great place to start because not only is it simple to get to grips with but it's also an excellent point to begin analysing how your customers react to your brand. It primarily involves determining how much your customers spend and how much it costs to get them to commit to these purchases. Here is the formula:
Customer Lifetime Value – Marketing Investment / Marketing Investment
I could spend this entire article discussing the overall importance of CLV, but luckily we already have an article doing just that. What I want to emphasise regarding ROI is that CLV will nearly always show that it's far cheaper to maintain customers than acquiring new ones, so make sure you market to your existing customers.
This is the second figure you’ll need to work out ROI.
Creating a brand now requires you to cover all digital bases. It's virtually mandatory to have active accounts on Facebook, Instagram, Google+, Twitter and maybe even Snapchat depending on your target demographic. All this is to create legitimacy and lead generation. However, monetary investment, such as PPC (Pay Per Click) advertising, should be placed in platforms that will yield the most click-throughs. This customer-centric approach makes your marketing endeavours worthwhile.
And don’t forget email: the old reliable email. It still yields about three times more conversion rates than social media, as McKinsey & Company investigates.
Have one eye on your business campaigns and another on your competitors’. SEMRush is just one SEO suite that enables you to get a sneaky peak into your competitor’s strategies. You get a look into their keywords, PPCs and a whole toolkit of other features. All of this will help to improve your return because you’ll be able to avoid the pitfalls that other companies make.
Your marketing campaign does not exist within a vacuum. It is the direct opposite. Success in digital marketing depends on how your campaign interacts with a host of platforms, backlinks, shares, likes and much more. Therefore, if your product is trending because a similar product has invested in a killer campaign and your product is riding on the wave of their prosperity, then it’s worth evaluating your marketing campaign’s contribution to this.
Using ROI correctly and honestly shows you what does and doesn’t work for your products on the ground.
How do you calculate your ROI?
Some of you may be familiar with the traditional ROI formula from dusty books at school:
(Return – Investment) / Investment
We don’t use this all that much in digital marketing because it’s too vague to capture what “investment” is, as we’ve already discussed. We’re going to use the same format but rejig the words to update it and make it more straightforward to work out. So here is the shiny, new ROI formula to add to your arsenal:
LTV – CAC / CAC
Another tip is to apply the formula to a particular channel. It’s too complicated and vague to apply ROI across all channels and gives back little insight.
Here’s an example of how to use ROI: if the LTV (lifetime value) from Facebook Ads is $100 and the cost to acquire each customer from this channel is $25, then your ROI is ($150-$25)/$25=5. I manipulated the formula to get a ratio of 5:1 and you know what that means... You’ve achieved a decent marketing ROI. Hooray!
It’s at this point where you can see how powerful a formula this is. You can start investing in platforms that get you the most customers and growth. You’ll find platforms that were once occasionally used now bring in customers at a lower cost. Suddenly, you’ve become much more shrewd when evaluating where your market budget gets allocated. Have fun increasing revenue and creating a kickass marketing campaign!
Need a little help?
Don't stress - that's what we're here for. For more marketing tips and tricks, get in touch with Elkfox today!