Smart Marketer’s guide to Marketing Return-on-investment (ROI)

Marketers are creative, imaginative and extremely innovative. They spent hours segmenting their audience and attracting the customers in their niche. Companies spent between 2% to 20% of their revenue in marketing, often called marketing spend. The money spent on marketing is crucial as you can have the best product, but it will be worthless if it doesn’t get in front of the right customers.

Marketing spend is vital for any company but it’s a cost to the organization and there are always questions like if the money spent is worth it? Is the demand increase related to the marketing dollars spent? Did people buy as a result of marketing campaign or advertising? These are critical yet hard questions to answer but Return on Investment (ROI) analysis can help.

ROI can be calculated as =

(additional value generated by the marketing investment-Cost of the marketing investment)

____________________________________

          Cost of the marketing investment

A ratio of 5:1 is considered a good ROI ($1 spent generates a $5 return) but the ratio could be different by industry and channel. Without any doubt, ROI is a good way to gauge the effectiveness of dollars spent on marketing, but this method does have its own challenges:

– Which costs to include and which ones to ignore? Is cost of the people included in marketing spend?

– Which revenues to consider and attach to a campaign or program? It is hard to determine if the purchase made was driven by company’s Facebook advertising or because of a recent Google Ad. To combat this issue, marketers look at the customers’ last touch point (was the customer’s last marketing interaction with the company was via Facebook or Google?).

Most organizations get myopic when it comes to marketing spend as it’s money out of the door NOW. Most executives (especially Finance people like me..oops) forget that yes it’s a cost right now and will reduce your profits for this year but this is an expenditure that will pay off in years to come in the form of “Brand Equity. That’s why it’s important to keep the concept of Customer Lifetime Value in mind (more on the topic in later post). Essentially, the concept explains what value one single customer brings to your business. You can’t see a customer as a $12 customer that may take $12 to acquire (zero ROI) for shampoo if he purchases it 12 times a year for next 30 years, that a $4,320 customer ($12x12x30).

Other than ROI, what other measures do you rely on to evaluate your marketing campaigns?

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