Marketers are always looking for ways to make their marketing efforts more effective. One way is to measure the return on investment (ROI) of those efforts, which can help them determine whether they're spending their budget wisely. But ROI can be tricky—it's not a simple matter of dividing revenue by expenses. Here's what you need to know about how marketers actually calculate ROI and why it matters so much.
Rooting it in reality
ROI is a measure of the return on investment. It's not the same as profit (i.e., what you make after subtracting costs from revenue), it's not sales, and it's not revenue. ROI is simply one way of looking at your data to see if you're making an investment worthwhile — in other words, if your business is growing or shrinking with respect to that particular initiative.
To calculate ROI for marketing initiatives, first look at the projected cost for that project: say it's $10K per month for three months. You'll also need to know how much money will come from each person who uses this product/service: say it's $20 per user per month (this could be monthly subscribers or transaction fees). Now take those two numbers and divide them by each other:
$10K / ($20 * 30 users =) $2 per user; then multiply by 100% because 100% means "all" instead of just "some":
100% x 2 = 200%. This is what we call our "return". The goal here isn't just about maximizing revenues but also minimizing costs; so we'd like our return to be bigger than 1 (the minimum amount required for us to break even). In this case 200% might seem like a lot but let’s keep going...
How is the formula actually applied?
To calculate your ROI, you'll need to know the revenue generated by a campaign and its associated costs. You can do this by looking at financial statements or your Google Analytics account.
Once you've got those two figures, plug them into this equation:
```revenue / cost = return on investment (ROI)```
Multiply that result by 100 to get a percentage value for your campaign's ROI.
What should the ROI results show?
- Monthly ROI calculations will help you determine how well your social media marketing campaign is doing and whether it's worth continuing. If the ROI is low, then you may want to cut your losses and move on.
- Per-campaign ROI calculations are also useful in determining which campaigns need more attention or should be scrapped altogether. Again, if one campaign isn't performing well enough for its cost, then it may not be worth continuing—especially if there are other options that are producing better results.
- For example, let's say your business spends $1,000 per month on all of its Facebook advertising efforts combined; but only receives a 1% return on investment (ROI). In this case, it would be better for you to invest in Pinterest ads instead because that platform has an average monthly ROI of 15%.
Why should marketers care about ROI?
ROI is a measurement of the value of your marketing efforts. It's the amount of money you are making from those efforts.
Marketers typically use ROI to compare the performance of different marketing tactics and channels, and to determine how much money they should spend on them in the future. ROI can also help marketers prioritize their marketing goals, since it indicates which ones are providing the best results for their budget. For example, if an email campaign had a high ROI but another channel like search did not provide much value for its cost, then we know that email would be more valuable for future campaigns (assuming it's still effective).