- One of the factors that defines the success of a business is its ability to create a solid strategic marketing plan.
- For small business owners, ensuring that the marketing strategy is en pointe is important.
- The capital available to invest is limited, as are other resources needed to improve the positioning or visibility of a brand.
- Given these conditions, calculating ROI or Return of Investments on every marketing plan becomes crucial.
- With limited funds, it is important to ensure that these strategies meet the intended goals and objectives.
- Let us break down the concept of ROI and understand how you can determine whether a particular marketing activity is worth the investment.
What Does ROI Mean?
- In the world of finance, the phrase ‘Return on Investment’ usually refers to the financial profits one stands to gain from any investment.
- This concept can also be applied to any other aspect of your business that has monetary repercussions.
- Calculating the ROI gives you a way to quantify any investment that you make in business activity, in this case, a marketing activity.
- Two factors determine the ROI.
- First, any reduction in your marketing spending may be taken into account.
- The second, or the more popular factor, is the revenue you gain from a particular promotional activity.
- If you get higher profits with lower investment, the strategy is considered a success.
- The technical terms are ‘negative ROI’ if the spending is higher than the returns and ‘positive ROI’ if the earnings are greater than the amount you spend on a marketing campaign or activity.
The Importance Of ROI For Marketing
- As mentioned above, only if a marketing campaign generates good returns, it is considered a success.
- However, there is no formula or trick to ensure this.
- Therefore, marketing professionals make use of the ROI to assess the performance of a campaign.
- At the end of the day, marketing is more than just a good visual and catchy copies.
- It all comes down to numbers and figures.
- Calculating ROI helps you combine the two to get the best possible outcome.
- It enables marketing professionals to do everything possible to get better conversions and also improve their relationship with existing customers.
- On the other hand, it also makes marketing professionals more accountable for the campaigns they run.
- They can make sure that their funds are being invested correctly.
Factors Influencing ROI
- Superficially, calculating ROI may seem very simple, but there are a few key factors that one needs to consider when it comes down to the final figures.
- You need the correct statistics and data to assess the costs and returns accurately.
- To begin with, let us consider the various factors that determine the calculation of your ROI.
- Cost factors, in simple terms, are the expenses or investments related to your marketing campaign.
- There are different types of expenses, such as:
The Functional Expenditure
- Besides the actual promotional costs, there are other costs, such as the wages payable to the staff employed for a campaign.
- You also need to factor in technical costs like website maintenance, printing, cost of sales, and management costs related to your business.
- Any cost incurred in creating a brand identity, such as logo design, falls in this category.
- This also includes the costs associated with the time you spend on ideation, developing a marketing campaign, and finally implementing it.
- This includes unforeseen marketing costs that you incur while creating a campaign.
- This may consist of any change in business practices, services, or even your products due to a previous or current marketing campaign.
- Even with respect to the returns, it is not just about the sales or conversions.
- There are other types of returns that need to be considered.
- As the name suggests, this is the most evident return on your investment in any campaign.
- This includes the sales that you make or any new contracts that you obtain as a direct result of the campaign.
- However, it is important to understand that these monetary gains are not the only benefits that one must consider.
A Shift Of Perception
- Although ROI is predominantly associated with revenue, this is not the only type of return that matters in marketing.
- A smartly devised marketing strategy can change how a customer views a brand or acquires more knowledge about a brand.
- This is also important as it helps improve sales and overall business in the future.
- Even making more customers aware of your brand is considered a positive return on your investment.
- This is what makes calculating marketing ROI so tricky.
- When it comes to marketing, you also need to think about the bigger picture and possible future gains.
Returns On Future Business
- A marketing strategy is considered successful even if it realises its potential for future business generation.
- If a marketing spend improves the visibility of a brand and the chances of conversions in the future, it is a viable return.
Three Types of Monetary Returns
In this section, we will discuss actual figures. There are three types of monetary profits that you should understand:
- The Total Revenue: This includes the total revenue generated from your marketing campaign before you make any deductions.
- Gross Profit: This is the total revenue minus the cost of manufacturing a product or delivering a particular service.
- Net Profit: This is the revenue that you generate after deducting all the expenses that you incurred while creating and executing a marketing campaign.
There are some formulas that can be used to calculate monetary ROI. The three most common ones are :
(Sum of Returns-Sum of Investments)/Sum of Investments
This is used to calculate the profits made from an investment. The calculation is in the form of a percentage and is measured using the formula above.
(Gross Profit Of Units Sold- Marketing Costs)/Marketing Costs
This is also a percentage that factors in the gross profit made from the number of units of a product or service that you have sold and the actual investment in a campaign.
(Customer Lifetime value- Investment)/Investment
- This is a measure of the profits made from one customer or several customers from when you started your engagement with them.
- This is the net present value of any profit that you have earned over time.
- This is the best way to calculate your actual ROI as it gives you important insights into various areas of your business such as:
- Customer Acquisition- This shows you how to spend your money to gain new customers.
- Customer Targeting- You are able to assess which customer segment is most profitable for your business.
- Single Customer Profitability- This helps you assess the profits earned from a single customer.
- Customer Retention- This shows you the best way to spend money on marketing in order to ensure that current customers remain profitable. What you need to spend to make sure your customer comes back to you.
Customer Lifetime Value is very important for small businesses as it helps them scale up in the future by defining customer behaviour and preferences.
(Profit- Marketing Investment- Overall Allocation- General Expenses)/ Marketing Investment
- This formula takes into account all the expenses and gives you a clear picture of the actual returns.
- The formula that you use changes based on the nature of your business and what return factors you wish to calculate.
- In conclusion, calculating ROI is pivotal in improving marketing strategies to make your business grow faster and improve conversions.
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