What is a good Marketing ROI?
All small businesses should invest in marketing. Consistently delivered marketing will enhance your brand, build your reputation and drive new business. At this point, the two questions we get asked are:
- How much should a small business spend on marketing? See our thoughts on this here.
- What is a good marketing ROI?
What is ROI
ROI stands for return on investment. You want all your investments to increase in value. You put money into ISAs and your pension to save for the future and you pay professional investors to grow that investment for you. It is the same with your marketing investment.
The marketing ROI calculation is: (Marketing revenue – marketing cost)/marketing cost.
Usually displayed as a multiple (X:1) or a percentage, your return on investment (ROI) show how much you get back. If your marketing generated exactly the same return as you spent, your marketing ROI would be shown as 1:1, or 100%. Clearly you want more back, but what should you expect and over what timescale? What is a good marketing ROI?
A great marketing ROI
Neilson research is often quoted as saying the average ROI from marketing is just 1.09:1. However, this is data from 2009! A good marketing ROI is 5:1, or 500%. For every £1 you spend on marketing, you get £5 back, after the cost of the marketing is taken off. A 10:1 ROI is considered exceptional, based on a range of articles published on the topic.
These figures are based on revenue and not profit, so you need to ensure that you take your gross profit margins into consideration when reviewing your marketing performance. If your gross margin is 100% (Cost of Goods Sold (COGS) is 50% of sale price), your marketing ROI needs to be at least 2:1 to make it worthwhile.
When should you measure your marketing ROI?
There is a tendency to measure the marketing ROI too early, as management look to get back the investment quickly, but you do need to measure, so when is the right time? We had a client who, a month after a trade show, moaned that the ROI from the event wasn’t good. However, when they looked back again 12 months later, the directly attributable revenue was over £100,000! To work out when you should measure the ROI, the biggest factor to consider is your average lead time – how long does it usually take for a lead to turn into a sale? If it usually takes six months for a lead to convert, there is absolutely no point in measuring the ROI of that campaign anytime before then.
Each new client your marketing generates can spend with you just once, or for many years to come. The revenue generated from these clients needs to continue to be taken into consideration when you calculate your marketing ROI. We ran PPC campaigns for 5 years for a client. Initially the budget was just £10 a day, but over time that increased as the revenue generated continued to flow. The spend in the first year was about £3K, generating about £30K first year spend. Over the next 4 years, the total PPC spend added up to £129K, but the revenue generated from those clients was £4.3milllion – a 33:1 ROI!
How to generate a great marketing ROI
The numbers will tell you. Once you have measured the ROI from each individual marketing channel you are using, you:
- Immediately stop any with a negative ROI
- Move your marketing investment to those channels that produce the highest marketing ROI
You’re currently using three marketing channels:
- Print advertising, generating a 3:1 ROI from £15K annual spend
- Pay per click Ads, generating 4:1 From £10K
- Search Engine Optimisation, producing a 2:1 ROI from £12K
You generate a total of £146K; a marketing ROI of 2.94: 1.
If you redirect the SEO spend evenly across the other two, assuming the ROI is maintained, you will increase sales to £164K, an ROI of 3.43:1.
If you had diverted all the SEO spend to PPC, revenues would have increased to £170K or a 3.6:1 ROI. Diverting all your marketing budget to PPC could generate £185K, but single channel marketing campaigns rarely produce an ROI that is better than an multi-channel approach.
The other factor that does need to be considered is other marketing channels. Are there other marketing channels that could produce a better marketing ROI? You’ll never really know until you try them, but we recommend you take advice before simply diving in.
We hope this helps.