June 5, 2015 Cash Flow en_US Is your marketing spend translating into the return on investment you need for you business? Find out how to use revenue, profit and other metrics to measure ROI. https://quickbooks.intuit.com/cas/dam/IMAGE/A7grwHhyD/4ee1ca1dc369e23f23b706a3bc329514.png https://quickbooks.intuit.com/r/cash-flow/measuring-return-on-investment-is-your-marketing-plan-paying-off Measuring Return on Investment: Is Your Marketing Plan Paying Off?
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Measuring Return on Investment: Is Your Marketing Plan Paying Off?

By Bridgette Austin June 5, 2015

Though marketers are making progress when it comes to connecting marketing activities to business results, practitioners still find it challenging to properly track and assess the success of their marketing programs. According to Content Marketing Institute’s “2015 Benchmarks, Budgets and Trends” report, “Measurement is a key area where B2B marketers are struggling: Only 21% say they are successful at tracking ROI.”

While it’s neither feasible nor profitable to measure every single aspect of marketing, return on investment (ROI) remains one of the most important metrics for discovering whether your marketing efforts are bringing in new customers and driving sales.

Also referred to as return on marketing investment (ROMI), marketing ROI is used to create a better understanding around the marketing campaigns and tactics that work and don’t work for your organization. Answering questions related to budget-spend versus ROI-gained creates accountability on your part and reveals how well or poorly your marketing strategies are performing.

While different businesses will use different metrics (and even different formulas) for measuring the overall effectiveness of their marketing efforts, there are some basic best practices you can follow to measure marketing ROI. Once you know the ROI of your marketing channels and activities, you can improve not only the quality of your marketing programs, but also confidently decide where to allocate dollars for future projects.

Start With the Basic Formula

According to the Factiva Institute, ROI is “An accounting and management concept used to determine financial benefit or value received in comparison to capital invested.” Within the context of marketing, practitioners might calculate ROI by simply comparing revenue gains against marketing dollars spent.

For instance, if you spent $2,000 organizing a customer event, but brought in $4,000 as a result, then you achieved 100% ROI. Thus, the simplest equation for calculating ROI would look like the following multiplied by 100:

ROI = (Revenue – Marketing Investment) / Marketing Investment

Thus, if the calculation for your marketing campaign results in a negative ROI percentage, then you may consider putting your marketing dollars elsewhere to yield better returns for your company.

Account for Gross Profit

There’s debate on whether the traditional ROI calculation is sufficient, since it ignores costs of goods sold (COGS), operating expenses and other overhead factors. Thus, some marketers argue that using gross profit rather than revenue is a more accurate measure of marketing ROI. Therefore, the revised equation for calculating ROI would be:

ROI = (Gross Profit – Marketing Investment) / Marketing Investment

Using the above formula factors in gross profit from the products or services your business is selling rather than solely gross revenue. Even so, one of the reasons why it’s difficult for business owners to measure marketing ROI is due to the numerous intangible benefits (i.e. increased brand awareness, customer satisfaction, etc.) that are difficult to measure and quantify. All of these different variables, which happen on both the investment and profit side, can quickly make ROI calculations complex.

To circumvent this obstacle, some marketers take a more in-depth approach by using marketing-mix models that capture both the short-term (e.g. profit) and long-term (e.g. brand awareness) impact of marketing activities. Nielsen is one such brand that employs marketing-mix solutions to “measure the efficiency and return on investment (ROI) for every type of marketing spend on every product in every market” for its clients.

Combine ROI With Other Marketing Metrics

It’s tempting to look at marketing spend as a cost rather than as an investment in your organization. That’s why it’s important to document your marketing strategy upfront and identify the metrics you’ll use to weigh the costs and benefits of your marketing campaigns. As stated in Forbes, “The new ROI of marketing goes even further than investments and impressions. It also encompasses return on engagement, objectives and opportunity.”

Keep in mind that marketing ROI should focus on improving your marketing activities so they better align with your company’s strategic goals, not just your marketing objectives. Making sure those metrics resonate within your company and support your business drivers will create further transparency and clarity around your marketing efforts.

For other metrics that can improve your marketing, check out these five lesser-known metrics that can give you the edge you need.

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Based out of New York City, Bridgette is a technology writer in the higher education sector. Throughout her career, she has written a variety of business publications for organizations ranging from Big Four accounting firms and environmental consultancies, to software and college textbook companies. Read more