Return on Investment Definition
The Return on Investment KPI measures how much revenue a campaign is generating compared to the cost of running that campaign. Business leaders and marketers are held accountable for advertising spend with results that contribute to company growth. This KPI answers the question, “What margin on our spend are we getting back?”
There are a few helpful ways of looking at your return on investment. Option one being net revenue is recouped after your marketing costs is taken out, and option two is the rate in which you get a return on that investment. Option two is a great way to normalize your performance so you can compare to other campaigns you've ran in the past to see how well the campaign performed.
Option 1 - ROI Value
Return on Investment (ROI) = Attributable Revenue – Campaign Investment Cost
Option 2 - ROI Rate
Return on Investment (ROI) = ((Attributable Revenue - Campaign Investment Cost) / Campaign Investment Cost) x 100
- Leads: New prospects generated by a marketing campaign.
- Attributable revenue: New-new revenue generated by a marketing campaign
- Wins: New customers generated by a marketing campaign.
Return on Marketing Investment Example
Let’s say we have a company that spends $15,000 on advertising to drive sales for their T-shirt business. The ads resulted in 1,000 leads that generated $35,000 in revenue. The calculation goes:
VALUE - Return on Marketing Investment = ($35,000 - $15,000)
RATE - Return on Marketing Investment = [($35,000 - $15,000) / $15,000)] x 100
The marketing team, in this case, was able to achieve a $20,000 return on their investment at a rate of 133% for their T-shirt business.
Return on Investment Best Practices
Marketers should be looking at both the rate of their ROI and the overall value. They have two separate purposes. For the value itself, this may be tied to an overall revenue goal set by the company or team based on historical trends or business models. The value is the big picture key performance indicator. The reason we don't look at the rate by itself is that it is independent of how much revenue actually comes in from the campaign. For example, you could spend $10 on one campaign and make $20 in revenue and then $2,500 on another campaign and make $3,500 in revenue. The first campaign had an ROI rate of 100% whereas the second campaign of $2,500 spend, only had an ROI rate of 40%. What would you say performed better for the business?
When calculating ROI try and factor in the following variables:
- The integrity of the reporting - is the data trustworthy?
- The people costs it took to execute the campaign - how many people and hours were put into these campaigns?
- The profitability of the ROI, did it match company targets?