What is the ROI of marketing?
Almost every marketing specialist will urge you to accurately calculate the ROI of marketing. You should measure every marketing effort separately to be able to know what’s working best. ROI (Return On Investment) means how much you gain/lose relative to your investment. So, if you spend $1 million in a TV advertisement and that ad generates $5 million in revenue, your ROI is 400%. Seems simple and rational? Well, it’s in no way simple and I wouldn’t say it’s entirely rational.
Why you shouldn’t think about the ROI of marketing
There are 5 reasons why you shouldn’t think about your ROI of marketing.
- Marketing should be built into your business idea. If your product is interesting enough people will talk about it. And you don’t have to pay anything for word-of-mouth marketing.
- There’s no way to know the ROI of marketing for a specific marketing effort. All your marketing should work together. Maybe the customer, who decided to buy after seeing your magazine ad, wouldn’t have bought from you if they hadn’t heard the radio ad. You’ll often get inaccurate results no matter how precisely you track your marketing.
- If you concentrate on the ROI of marketing you easily forget to track other aspects of your business. Customer service and sales people often create much more sales than any advertising.
- Your marketing budget is like the phone payment; it’s part of the cost of doing business. You don’t try to calculate the ROI of email do you?
- The difference in the life long value of customers makes it impossible to calculate the ROI of marketing. Even if you knew what made a customer come to you in the first place, there’s no way to know what’s their value to you.
So, you shouldn’t think about the ROI of marketing. Then how can you know if your marketing works or not?
How to measure the effectiveness of marketing
Rather than trying to calculate the ROI of marketing you should compare your marketing efforts to your overall results. If you’re making a profit your marketing works. Maybe not all marketing you do, but at least enough of it. To get better at marketing you should also know what’s working and what’s not. Here’s some ideas on how to track marketing results.
- Identifiers. Use promotional codes and other identifiers in your advertisements to track which ads were seen and acted on.
- Target specific audience. Create ads that are only seen by a specific target audience. It’s easier to track who buys rather than why someone buys from you.
- Change location. Systematically change where your ad appears to find the best place. Placement in newspapers and websites alike is important, because only a tiny portion of the space is actually looked at.
- Change the design. Changing just the color of a headline can have a major effect even if nothing else changes. People respond to different colors in different ways. Remember that the surroundings of your ad will also play a part.
To benefit from the results you get by doing all this, you need to do A/B-testing. Make changes to your marketing to make it more effective. If you want to do accurate A/B-testing you can only change one detail at the time. Otherwise you won’t know which change actually mattered. But even more vague results can be helpful.
How much should you spend on marketing then?
Short answer: as much as you can as long as it creates a profit. But the more you invest the smaller the ROI of marketing will be.
Most effective marketing methods are usually online marketing and content marketing. Both are extremely cheap compared to traditional advertising and usually create much better results. They work so well because you can target the best opportunities individually and with low-cost. But the more you market the poorer the targeting becomes; you start with the best, the second target is only the second best opportunity, and so on. As the marketing campaign grows you can’t choose so specific targets anymore. And that leads to a smaller ROI of marketing.
Don’t think about the largest amount of money you can spend on marketing. Rather think about the results you’re after. If you want to reach the people who will make lots of referrals, then do that. If you want to increase brand awareness, do just that. You can spend as much money as you like on both, even though one targets only a few people and the other all the people.
Make a list of 3-5 most important goals you have for your marketing. I’d always start with reaching the early adopters. If they’re already using and promoting your product then go after target groups. Target groups are groups of people who are most likely to enjoy your product or benefit from it. These target groups are larger than the group of early adopters but still way smaller than the general public. Once the target groups use your product, start marketing to the masses. These “masses” may still be only a handful of people; in a niche market that’s very possible. But I’d use the same logic anyway: early adopters – target groups – the rest of them
When you have your list ready think about how much value you give to each of them. You’ll quickly build up a math problem. Once you solve it you’ll know how much to invest in each.
You might think there’s no point in using more money to reach a few early adopters then to build brand awareness. Why is that? If you value more reaching the early adopters and target groups (as I do), then why wouldn’t you invest more effort into that? Obviously if your product is already well-known there are no more early adopters to target, and the target groups are already using your product. But the idea still stands: spend most of your budget and effort in the most important goal.
If and when your business makes a nice profit you know your marketing worked as it was supposed to. That’s a good ROI of marketing.
What do you think?
How would you calculate the ROI of marketing? Do you do it? Share your ideas and experiences in the comments below.