What is ROI and Why Should Marketers Measure It?
It’s tough being a marketer these days (well, not tough but difficult-ish). Not only do trends and tactics change at an alarming rate but if you’re new to the game you’ll also be barraged with seemingly unfamiliar acronyms left, right and centre: KPI, SEO, CRO, UX, PPC, TTFB, SME, B2B, YMCA… FFS!! How are you supposed to figure out which acronyms actually matter for your marketing?
It doesn’t matter who you are or what you do, in the grand scheme of things there’s only one acronym that really matters - ROI.
So what is ROI anyway?
ROI (or Return On Investment) is a measure of loss or gain on an investment in comparison to the actual amount of money spent or invested in a particular campaign, activity, tool or product.
Typically you’d express your ROI as a percentage but often ROI is used synonymously with net profit or net loss. ROI is a bit more specific than that though...
Here’s an example - if you’ve spent £5,000 on Google AdWords per month and those adverts generate you £7,000 worth of new business, then your net profit that month is £2,000. In order to calculate the ROI of that spend you need to divide your net profit by the initial cost of investment (the cost of the AdWords) in order to get your ROI percentage.
So, using the Google AdWords example:
ROI = (Net Profit 2000 / Investment 5000) x 100 = 40%
So why should I care about ROI?
You really should care about ROI as (contrary to popular belief) marketing is not all about brainstorms, bean bag chairs and throwing mud at the wall; it’s about seeing what mud actually sticks (and bean bag chairs). It’s extremely unlikely that you’re sticking all your eggs into one basket when it comes to your marketing strategy i.e. no one just does AdWords (if you are just doing AdWords, maybe you should give us a call!) By calculating the ROI of each of your marketing tactics, you can easily identify where you should be spending more money and where you should consider spending less money (or even stop spending money altogether).
Let’s go back to this Google AdWords example.
You already know that your Google AdWords spend has an ROI of 40% (which ain’t too shabby at all…) but you might also be employing an SEO agency and spending money on email marketing campaigns in addition to your AdWords spend.
Let’s say that the SEO agency is attracting £8,000 worth of new leads per month through the amount of increased organic traffic they’re generating for you. If you pay the agency a £3,000 retainer fee this gives you a net profit of £5,000. Your SEO ROI (say that ten times fast) is therefore 167%. Well done SEO agency!
Now, let’s pretend that your email campaigns are costing you £800 per month and are generating you £2,000 worth of new leads. Your net profit would be £1,200 which means that your email ROI is 150%.
By doing your ROI calculations, it’s easy to see that SEO is the most profitable (but not necessarily the cheapest) marketing activity followed by email and then AdWords. If you really fancy it, you can even associate man hours with a fixed cost which will give you an idea of how profitable the time you spend actually is.
Hopefully by reading this you’ve gained some insight on how to demonstrate value to your boss, your accounts department or even just to yourself. If you want to learn even more about tracking KPIs and ROIs, you can download this handy guide: ‘5 Steps to Defining and Reporting Your Online ROI’. You might also want to check out the measurement framework below which can help you make the connection between your business objectives and your digital spend.