How to Calculate the Return on Investment (ROI) of a Marketing Campaign

Marketing is everything a company does to acquire customers and maintain a profitable relationship with them.

While it is not an exact science, its practitioners are getting better at segmenting prospects and creating marketing campaigns that are more effective at helping them reach their goals. 

Perhaps the most pressing questions that companies have about their marketing campaigns entail the return on investment (ROI) they’re getting for the money they spend.

In this article, we’ll look at ROI and a few ways to calculate it.

Key Takeaways

• Companies measure ROI to determine if a marketing campaign was cost-effective.
• A high ROI indicates that a marketing campaign was effective.
• The simplest way to measure ROI is by dividing the net increase in sales by the marketing cost.
• A more accurate (but complicated) method also accounts for the organic sales growth that occurred before a marketing campaign began.
• Other measurement methods account for the generation of new sales leads, brand awareness, or other key metrics.

What Is ROI?

Return on investment is a financial metric that’s used to evaluate the profitability of a project that’s underway. It helps those involved determine whether or not the investment in the project was worth making.

Broadly speaking, it’s fairly easy to calculate. Take the current value of the investment/project and from that subtract what it cost to launch and maintain it. Then divide by the cost and multiply by 100 to get the ROI percentage.

It can also be useful to businesses to estimate an ROI before they start a project. For this, they calculate an anticipatory ROI using projections for costs and returns.

Companies can use the metric, along with other factors, to compare investment opportunities before they select one to go with.

How Do You Calculate Simple ROI?

The most basic way to calculate the ROI of a marketing campaign is to integrate it into the overall business line calculation.

You take the sales growth from that business or product line, subtract the marketing costs, and then divide it by the marketing cost. Then multiply that result by 100 to get a percentage.

(Sales Growth – Marketing Cost) / Marketing Cost x 100 = ROI

So, if sales grew by $1,000 and the marketing campaign cost $100, then the simple ROI is 900%.

($1000 – $100) / $100 x 100 = 900%.

Calculating Campaign Attributable ROI

The simple ROI is easy to calculate, but it is loaded with a pretty big assumption. It assumes that the total month-over-month sales growth is directly attributable to the marketing campaign.

For the marketing ROI to have any real meaning, it is vital to have comparisons. Monthly comparisons—particularly the sales of the business line in the months prior to the campaign launching—can help show the impact more clearly.

Using a 12-month campaign lead up, you can calculate the existing sales trend. If sales are seeing an organic growth on average of 4% per month over the last 12-month period, then your ROI calculation for the marketing campaign should strip out 4% from the sales growth.

As a result, it becomes:

(Sales Growth – Average Organic Sales Growth – Marketing Cost) / Marketing Cost x 100 = ROI

So, let’s say we have a company that averages 4% organic sales growth and they run a $10,000 campaign for a month. The sales growth for that month is $15,000. As mentioned, 4% of that, or $600, is organic based on historical monthly averages. Thus, the calculation is:

($15,000 – $600 – $10,000) / $10,000 x 100 = 44%

In this example, taking out organic growth dropped the ROI from 50% to 44%, but that is still stellar by any measure.

In real life, however, most campaigns bring much more modest returns, so taking out organic growth can make a big difference.

Slowing Loss Is a Win, Too

On the flip side, companies with negative sales growth need to see the slowing of the trend as a success.

For example, if sales dropped $1,000 a month on average for the previous 12-month period and a $500 marketing campaign results in a sales drop of only $200 for the first month, then your calculation centers on the $800 ($1,000 – $200) you avoided losing despite the established trend.

So even though sales dropped, your campaign has an ROI of 60% calculated from ($800 – $500) / $500 x 100, That’s a great return in the first month of a campaign. It shows that the campaign reduced the average amount of lost sales. That’s a move toward profitability.

What Are the Challenges With Marketing ROI?

Once you have a fairly accurate calculation, the remaining challenge is the time period. Marketing is a long-term, multiple-touch process that leads to sales growth over time.

The month-over-month change we were using for simplicity’s sake is more likely to be spread over several months or even a year.

The ROI of the initial months in the series may be flat or low as the campaign starts to penetrate the target market. As time goes by, sales growth should follow and the cumulative ROI of the campaign will start to look better.

Another challenge is that many marketing campaigns are designed to do more than just generate sales.

Marketing agencies know that clients are results-oriented, so they get around weak ROI figures by adding in more of the soft metrics that may or may not drive sales.

These can include:

• Brand awareness via media mentions
• Social media likes
• The content output rate for the campaign
• Website traffic
• Backlinks

Brand awareness is worth considering, but not if the campaign itself is failing to drive sales growth over time.

These other benefits shouldn’t be the core of a campaign (unless it’s specifically designed for them) because they can’t be measured accurately in dollars and cents.

Important

Sales growth is not the only way to measure the effectiveness of a marketing campaign. Marketing campaigns can also seek, for example, to increase customer loyalty, audience engagement, or brand recognition.

Measuring ROI in Other Ways

We’ve been focusing on sales growth, whereas many campaigns are aimed at increasing sales leads that the sales staff then is responsible for converting to actual sales.

In this case, you need to estimate the dollar value of the leads by multiplying the growth in leads by your historical conversion rate (the percent of leads that actually buy).

There are also hybrid campaigns where the marketer brings leads through a qualifying filter to get a non-sales conversion; for example, something like a person signing up for monthly real estate analysis reports by giving the marketer an email to pass onto the mortgage broker client.

The ROI for a campaign like this still has to be measured by how many of those email leads you actually convert into paid sales for goods or services over time.

Why Does ROI Matter?

It matters because it’s a way to determine how profitable a marketing campaign is, whether it was worth paying for, and whether the money would have been better spent elsewhere. It’s a metric that can play an important role in a company’s strategic decision-making.

What Is Considered a Good ROI in Marketing?

Every business is different, so the bar varies from product to product and from market to market. In marketing terms, an ROI of 5:1 is considered a strong return on investment—in other words, the net increase in sales or other business should be about five times greater than the cost of the marketing campaign. An ROI of 10:1 would be considered exceptional, but an ROI of 2:1 would be insufficient for many industries, due to the additional costs of making and selling the product.

What Are Other Key Performance Indicators (KPIs) in Marketing?

Beyond measuring the increase in sales growth due to a marketing campaign, other KPIs, such as sales leads, social media engagement, click-through rates, and search engine rankings, may be used to evaluate how well a marketing plan is meeting a company’s objectives.

The Bottom Line

To be clear, marketing is an essential part of most businesses and can pay many times over what it costs. However, you need to measure its results. Marketing firms will sometimes try to distract you with softer metrics, but ROI is the one that often matters for most businesses.

The ROI of any marketing campaign ultimately comes from increased sales. So run your calculation using sales growth minus the average organic growth on a regular basis throughout any campaign because results can take time to build.

That said, if the ROI isn’t there after a few months, it might just be the wrong campaign for your target market.