The saying goes, if you can’t measure it you can’t manage it. This is definitely true for Internet marketing. More and more organizations are investing in Internet-based marketing with the goal of growing their business. Yet, many of these companies are not monitoring their return on investment (ROI) for these activities.
That is a mistake. How do you optimize if you don’t understand the impact of your efforts?
Defining ROI
In the most basic terms, ROI is what you get for what you do.
It’s not click-through-rate or number of followers. It’s the actual value you generate for your marketing efforts.
Although this definition is simple, in many cases measurement is not. ROI measurement can become astoundingly complex; connecting marketing spending to a sale, new customer, or revenue is rarely a straightforward task.
However, determining ROI without driving yourself mad is possible – especially if you stick to the basics and avoid becoming lost in an ocean of soft data. Marketing terms like brand awareness and purchase intent might be important to understand marketing goals but are indirect indicators with no role in calculating ROI.
At its core, ROI is really about answering four questions:
- What’s your goal?
- What’s your goal worth?
- How frequently is your goal achieved?
- What did it cost to achieve your goal?
The basic formula for ROI calculation is:
((Net Revenue – Marketing Investment) / Marketing Investment) x 100
This formula represents three steps.
- First, determine the difference between net revenue and how much you spent (marketing investment).
- Next, take the total and divide it by what you spent.
- Multiple by 100.
This formula is deceptively simple.
Marketing investment is the easier-to-capture number of the two metrics you require. Marketing investment is the cost for a campaign plus any overhead. The second figure, net revenue, is a little more challenging to derive. Net revenue is the profit or loss from a campaign for a specific period of time. The diagram below illustrates this model in practice.
Keep in mind that the only way you can properly attribute costs and revenue is to track the marketing channels.
ROI: Keep It Simple
Although calculating even a basic ROI measurement requires some effort, that effort does come with rewards.
Measuring ROI allows you to understand if your campaigns and other marketing efforts are generating value so that you can optimize your marketing budget. From a financial perspective, ROI isn’t just about reflecting the past performance of your efforts. It is also a valuable tool for predicting the future.
As you get more comfortable calculating ROI, there are countless ways you could fine-tune your results. For those who want to dig deeper, there is an article (and lively discussion) about how to devise your ROI calculations at Marketing MO (a great site for all things marketing). You can also find links to ROI calculators and other tools.
Calculating ROI can get quite complex – however, you can rarely go wrong by keeping things simple!