Are You Getting a Return on Your Marketing Investment?
Are you getting a return on your marketing? It can be tough to tell.
You know you’re getting more traffic to your website, people are signing up for your newsletter, and your open rates are fantastic. And all of these are cause for celebration!
But translating this extra attention into dollars and cents gets tricky. The journey from finding your business on Google and signing up for your newsletter isn’t always a straight line. And it can be tough to tell if someone bought from you because of that beautiful email you sent, found you first when looking for “black dress size 8,” or their discovery had more to do with fate than marketing.
We’ll dig into ways you can measure how well your marketing efforts translate into dollars — all so you have a bit more visibility into whether you’re actually getting a return on your marketing.
How to Calculate Your ROI
On the surface, calculating your marketing ROI is a simple math equation. Just figure out how much your sales have increased, subtract your marketing cost, and divide the difference by your marketing cost to get a percentage.
For example, let’s pretend your average sales are $10,000 a month, and you’re paying $5,000 monthly for marketing services. And while we’re over here playing pretend, let’s also pretend COVID never happened.
You’ve been working with your marketing partner for 6 months. Your sales in that period have been $125,000, which is a pretty solid increase from the $60,000 it would’ve been if we’re going by the averages. It’s reasonable to assume your sales increased $65,000 because of your marketing efforts. You’ve also paid $30,000 for marketing.
So, when you plug those numbers into the equation, ($65,000 - $30,000) / $30,000 - 1.16 = your ROI becomes 116%, or a little more than 2x.
But, of course, if finding your ROI were that simple all the time, this article would end here. In fact, you probably already knew the answer to whether you were getting a return on your marketing in the first place — which means you didn’t need this article.
But, you’re still here reading this article (and we’re grateful). We’ve barely scratched the surface, so it’s fair to say the math gets more complex.
What about all the variables to your business? What if it’s a rough Midwestern winter, and your customers avoid your brick-and-mortar stores — causing explosive growth in website sales. Or maybe a global pandemic happens and the economy plunges into recession, causing your sales to dip.
How do you determine if those Wisconsinites in their igloos would’ve gone to your website regardless of your ads? Or whether your investment in SEO kept your website in front of your customers, meaning your sales slid less than they would’ve without marketing?
Finding the answer to those questions, of course, is unique to your industry and company. So, next, we’ll go into metrics you can use to understand your ROI just a bit better. Sit down, keep your arms and heads inside the vehicle, and buckle up.
The World of Metrics: What You Should Measure
When your marketing partner shares reporting with you, there’s a good chance your monthly report will tell you how many pageviews you’ve gotten, the number of new Instagram followers, your average open rate, and where your website appears in Google rankings.
But the reporting likely stops there. It doesn’t talk about how email opens translate to new purchases, or how many people who arrived at your site via search became customers.
Understanding how many people are opening your emails and your average Google ranking are related to ROI. You’re probably not getting sales if nobody is opening your emails and your website is buried on page 8.
As you translate these figures into cold hard cash, you’ll need to do a bit more math. Here are some of the most common numbers to know:
Cost per Acquisition
- What is it? The cost to acquire a paid customer from marketing efforts
- Why does it matter? When you know how much it costs to acquire a customer, you can compare the number of customers your marketing has gained to the cost of services.
- How do I calculate it? Total marketing spend divided by total paid customers
Customer Lifetime Value and Average Order Value
- What is it? While each is slightly different, both measures refer to how much a customer will spend with your business
- Why does it matter? Understanding these figures help you gauge whether your cost per acquisition is good or not.
- How do I calculate it? For average order value, divide your total sales by your total number of customers. To find your customer lifetime value, multiply the average cost per product or service by the number of times your customer purchases your product.
Lead to Close Rate
- What is it? The number of leads it takes to get a paying customer
- Why does it matter? Marketing agencies typically stop their reporting at the lead. To understand if they’re bringing you enough leads, you’ll need to know how many will translate to customers
- How do I calculate it? Total number of leads/total number of customers in a given timeframe
The Downside: Challenges With Calculations
Determining the revenue you receive from marketing is a challenge in and of itself. As we hinted at earlier in this article, there are several caveats and challenges that make it tough to calculate your exact ROI.
Here are a few of the more common ones:
1. Marketing often takes multiple touches before turning into a sale: This caveat takes the straight line from discovering your business to the sale and turns it into a zig-zag. Someone could stumble upon your blog for some random reason, subscribe because they think you’re witty, love your newsletters, but not make their first purchase until a year later. Your marketing is obviously effective, because they keep reading your content and you’re top-of-mind when they are in the market for your wares. But, the highly variable timeline makes it tough to determine your marketing spend.
2. The dynamics of your sales cycle: If your business is very dependent on a variable that changes rapidly and without warning, like the Midwestern weather, it can be tough to forecast your sales, much less tie it back to your marketing efforts.
3. Who gets involved in the purchase decision: If you’re a B2B service provider, you often don’t get to pitch the CEO, and even if you do, they might not always see the value in your offer the same way as a manager might. In a case like this, pitching to the manager, who isn’t the person who writes the checks but sees how great your solution is, makes sense. They can pitch your solution to their CEO and get it approved, where if you were to go straight to the CEO, they might not get you. Which, of course, leads to lengthy timelines and convoluted tracking.
4. Measuring how sales and marketing work together (or don’t): In previous agency lives, we’ve worked with clients where marketing was bringing in leads, but sales never materialized. The CEO thought there was no ROI from marketing, when in reality, the situation was more complex. The actual issue wasn’t that marketing wasn’t bringing in customers, but rather they were getting lost in the shuffle from marketing to sales. Once the client fixed the handoff process, they realized the company was actually getting plenty of leads — but they were getting lost in the shuffle.
If you’re unsure of whether you’re getting a return on your marketing, it’s easy to understand why. There are so many variables that make it tough to know exactly how much money your marketing is bringing in — but you can get pretty darn close with a little math.
If you’d like some help figuring out your ROI, our team of expert technology consultants can set the systems in place to do the math. Or if you’d like to increase your ROI, we can help you with that, too. Get in touch, and we’ll happily talk KPI, ROI, SEO, DOG and anything in between.