If you’re like most people, you closely watch your investments, measuring and monitoring them to get the maximum return on your money. You also compare your current investments to other potential opportunities in the marketplace. However, when it comes to small business owners creating their marketing campaigns, many of us don’t feel the need to apply the same stringent guidelines when calculating your marketing ROI.
A marketing campaign is a big investment in time and money for any business. It needs to be monitored and evaluated to ensure you’re getting the best return on the resources spent to make it happen.
How To Calculate Your Marketing ROI
It can often be confusing how you should be calculating your marketing ROI (return on investment). ROI is the profits received for every dollar spent in your marketing campaign. It is expressed as a percentage of the investment. A marketing campaign usually involves more factors than a straight investment into the stock fund or a craps table.
Let’s look at an example. Bob launched a campaign to sell his widgets. He spent $25,000 on marketing and advertising. The campaign resulted in $50,000 of widgets sold. Bob was ecstatic, thinking his ROI for the campaign was 100%. Then he told his accountant, who didn’t seem nearly as happy. Actually, the accountant rolled his eyes. Why? Bob didn’t use the proper math to calculate his ROI.
Bob used his gross revenue ($50,000) rather than his gross profit to define his ROI. Let’s say it costs 50% to manufacture his widgets. That means that only $25,000 of the gross revenue is profit. Since he spent $25,000 in hard marketing costs, he spent the same amount of money as his profit.
Bob’s ROI has plummeted from 100% down to 0% with several clicks of his accountant’s calculator. What’s even scarier is that other expenses, such as employee time working on the campaign hasn’t been factored in yet. Sorry Bob, but you actually lost money on this campaign.
While Bob goes off to the local bar to cry in a pitcher of beer and his accountant figures out how to permanently block Bob’s phone number, let’s examine how we should be calculating your marketing ROI.
Add up your gross profit. This will be your revenue (let’s say for this example, it’s $300,000) minus your expenses ($100,000). In this case, your gross profit is $200,000.
Now add up all of your marketing expenses for the campaign (let’s say it’s $75,000)
Subtract your marketing expenses from your profit. $200,000 - $75,000 = $125,000.
Now divide your total ($125,000) by your marketing expense ($75,000). This number is your ROI percentage (
Return on Investment Formula:
Calculating Your Marketing ROI
- Add up all of your profit statements for one project. Your profit is your gross revenue minus any expenses.
- Add up all of your marketing receipts for your project to arrive at your total marketing expenses.
- Subtract your marketing expenses from your profit.
- Divide the total you got in Step 3 by your marketing expense. The resulting number is your marketing ROI percentage.
Marketing Campaigns Are Investments
And like any smart investment, they need to be measured, monitored and compared to other investments to ensure you’re spending your money wisely.
With solid ROI calculations, you can focus on campaigns that deliver the greatest return to your company regardless of which product or service you’re selling. After all, you probably earn more profit in some areas than in others.
Using ROI Also Helps Justify Marketing Investments
In tough times, companies often slash their marketing budgets – a dangerous move since marketing is an investment to produce revenue. By focusing on accurately calculating your marketing ROI measurements, you can help your company move away from the idea that marketing is a fluffy expense that can be cut when times get tough.
If you’re not sure how to calculate your profit, here are two more formulas:
- Gross Profit = Gross Revenue – Cost of Goods Sold [here's an article that shows you how to calculate COGS]
- Gross Profit = Gross Revenue * Profit Margin (the % of your revenue that is actually profit)
Need Additional Help? Contact Us!
Have more questions about calculating your marketing ROI? Contact us for more information!