Return on investment, more often referred to in business simply as ROI, is a performance metric used to calculate the success of an investment or business venture. ROI is based on the amount of money generated through the venture or investment compared to the amount of money invested.
Therefore, in marketing terms, ROI is the amount of revenue generated in comparison to the cost of a marketing campaign. The PDF attachment explains how to calculate ROI for marketing.
Good ROI for marketing means that more revenue is generated than has been spent on the campaign or strategy. Razi Salih has been involved in the digital marketing and advertising industry in various capacities for some years, including strategy creation to promote business ROI goals.
Marketers are required to not only understand and generate ROI, but also monitor and analyse this metric to be able to demonstrate how performance trends over time, as well as which investments create the largest margins of profit.
While there are various other metrics that can be applied, marketing ROI is the only one that lets marketers know how effectively they are using their budget and making the most of their overall spend on marketing.
Tracking ROI Through Leading Metrics
One of the issues faced with marketers using ROI as a performance metric is that often, sales transactions and revenue generation do not occur immediately. The benefits of a marketing campaign may not be seen right away; they may also be ongoing and therefore not measurable for weeks or months after campaign launch.
For this reason, markets may use leading metrics to evaluate the performance of the campaign in the earlier stages. This is particularly true for businesses in low-transaction industries. Analysing relevant leading metrics can identify to marketers how far they are progressing on the road to a sale, allowing for a more accurate measure of success before sales are made.
The key performance indicators that marketers can use as leading metrics will depend on the type of business, but they could include website traffic volume, lead volume, lead conversion, social media engagement, subscriptions, event attendance, or items added to an online shopping cart.
Budget Allocation
One of the key advantages to effective marketing ROI measurement is that is generates accurate knowledge about which areas of each campaign work best and which are performing poorly. This in turn lets marketers make educated decisions about where to allocate the larger proportion of their budget for future campaigns. Once under-performing areas have been identified, these can be discarded or improved on, while well-performing areas can be expanded.
Some tips for marketing budget allocation can be seen in the embedded short video.
Measuring Key Performance Indicators
Part of successfully analysing marketing ROI requires knowing which key performance indicators, or KPIs, to measure. These will vary depending on the type of business and the goals and objectives of the campaign.
Prior to sales generation, some marketers may find it useful to monitor the number of new leads gathered and what the average cost per lead has been. One of the more popular KPIs is conversion rates, measuring which channels are creating the best levels of conversion. The lead close rate can also provide useful information about the effectiveness of a marketing strategy.
Average order value, or AOV, calculates the average spend per customer on each order. This can be a valuable metric, especially where the total number of sales is not increasing noticeably, as revenue may still be on the rise.
Some of the different types of marketing performance metrics can be found in the infographic attachment to this post.