Most businesses will be aware that investment in a marketing campaign can yield fantastic returns. The problem with this though is that not all campaigns will be successful and the ROI a business will see is much less than expected.
ROI in marketing terms is a critical figure when it comes to businesses, especially new businesses. Generally speaking, a good ROI for a business is 300% to 500% (or between 3:1 and 5:1).
Of course though, there’s a lot more you’ll need to know to fully understand what makes a good ROI for a business.
This guide will examine what ROI is, how and why it is used, and ultimately what constitutes a good ROI.
Read on to learn more.
What IS ROI?
ROI stands for “return on investment”. It’s a term that is used in many areas of business, but for the purposes of this guide, we will be focusing specifically on marketing and advertising.
To most easily understand what ROI is, we can define it as the figure of added profit (return) that the business received back from its marketing spend (initial investment).
The two elements that are included in the calculation of ROI will be the reduction costs of promotional spend and extra revenue gains.
These are then pitted against the overall cost of the marketing campaign – if the calculated figure is positive – this is indicative that the business has made more money than the spend costs.
Conversely, the ROI figure will be negative if the business has spent more money than it gets back.
While we’ve briefly explained how to calculate ROI, this does not give it the full picture. In fact, calculating ROI can become a very complex operation.
Let’s start off by looking at the potential costs that come into play with marketing. Remember, this will play a huge role in the calculation of your ROI.
Factoring In Costs
Here are the main costs that you must factor in when it comes to calculating ROI for a business.
These are the functional costs that come into play with a campaign. These include staff costs, printing costs, email costs if applicable, costs associated with sales and any other technical based costs.
These are the costs associated with the actual brand creation involved with a campaign and coming up with the planning of a campaign.
All businesses will be aware that there are often costs that are supplementary, and therefore unforeseen costs when it comes to costing. This could be down to changes with business practices or something that you were not aware of at the beginning.
Factoring The Returns
Here are the return elements that have to be considered when calculating the ROI.
The whole point of starting an ad campaign is to generate more sales to your business, so any increases in sales as a result of the campaign will be the immediate returns.
If your business provides a service, this may also be new acquired contracts or even more renewals from old clients.
Referrals and recommendations may have yielded future returns, but as of yet have no taken place. However, these are important to note when it comes to the success of your campaign.
Good campaigns may tactically try to alter the customer’s way of thinking when it comes to a product or service or even a specific brand.
While this can be indicative of a very successful ad campaign, it is extremely difficult to incorporate this into a return figure.
Nonetheless, it should be considered and noted down for future planning.
Now it is time to work out what your ROI is. You can do this with the following formulae.
- Returns – Investments
- Gross profit of sold units – marketing costs
What To Remember About ROI
To truly understand ROI, you will need to bear the following information in mind.
The generated money from an ad or marketing campaign prior to you taking out the deductions. This is quite literally the top of your generated sales.
This is the revenue you have generated after taking into account the costs of things like goods or services. You can easily work this out with a cost of goods figure and deduct this from the total revenue figure.
Net profit is where you’ll start to see where you’re truly at with your ROI. It is simply your gross profit figure minus any expenses you have incurred in the campaign itself.
Why Is ROI Useful?
ROI is useful for most businesses, in particular small or new businesses. This is because they are able to assess how well their marketing campaigns are actually going.
As a result, they can gauge their customer’s views on their product, brand or service. Going forward, this is particularly useful because a business owner may decide to shake up their business practice, or alter their KPIs and expectations.
It’s all about being practical and looking toward your business future. If you do not calculate your ROI, you’re essentially gambling with how well your marketing strategy is going.
What Makes A Good ROI?
The easiest way we can work out what a good ROI is and then show its efficacy is using an example.
Let’s say you generate a total sales number of $1,000 with a 50% profit margin. Now factor in that this means $1,000 extra equates to $500 profit.
You therefore cannot spend more than $500 for every $1,000 added revenue because the margin of profit reduces. So, your break even in this scenario is 200%.
So, if you set yourself between 300 and 500% for ROI – you’ll be in a good position.
The Bottom Line
A good ROI will depend on your business and your campaign costs, but as a general rule of thumb – consider a good ROI to be 300% and above.
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