How to Calculate Marketing ROI (Return on Investment)

Proving marketing ROI is one of the most common challenges marketing agencies face.

In fact, we found 43% of agencies struggle to do so. For many, this is an issue with the tools they use (not enough data, clunky management, inadequate reporting, etc.). But for others, it’s a problem with misunderstanding the fundamentals.

So today, we’re going over those marketing ROI fundamentals.

• What is marketing ROI, why is it important, and how do you calculate marketing ROI?
• What is a good marketing ROI?
• What are the challenges of calculating marketing ROI?
• How you can more easily calculate your marketing ROI

Let's get started.

What Does ROI Stand for?

Definition: ROI stands for return on investment. It is a metric used to show the overall profitability and financial efficiency of an activity.

Generally, ROI is an acronym used to describe the return on investment of a specific initiative. Whether you’re launching a new product, expanding a department, or cutting down on waste, everything in a business can be measured in terms of profit and cost.

And ROI is a simple metric that shows the profit of an investment in relation to the cost of that investment.

A high ROI indicates an investment’s profit is high in relation to the costs. A low ROI shows the opposite—profit is low (or even negative) compared to the costs.

ROI is also usually expressed as either a percentage (250% ROI) or a ratio (5:1 ROI).

What Is Marketing ROI (a.k.a. Return on Marketing Investment)?

Definition: Marketing ROI, also known as return on marketing investment or ROMI, is a calculation of the profitability of a certain marketing activity.

As you can see, the general principle of ROI remains the same when applied to marketing. It all comes down to how financially efficient a marketing initiative is.

But what’s difficult about marketing ROI is that you need to account for only extra profit driven by a marketing initiative. And to calculate it, you need to take into account both the costs of running the campaign as well as the expected profit had the campaign not been launched at all.

We’ll get more into calculating marketing ROI in a bit.

But for now, it’s worth mentioning that ROAS, a popular metric for many marketers, is a subcategory of return on marketing investment.

ROI vs. ROAS

Definition: ROAS or return on ad spend measures how much revenue is generated per advertising dollar spent.

Return on ad spend is one of the most common measures of success for performance marketers.

While it’s similar to marketing ROI, it’s calculated a little differently.

While marketing ROI considers every expense from the marketing initiative (production, distribution, other overhead costs), ROAS just considers ad spend when calculating returns. So each dollar generated is compared only to the expense of running an ad, not against expenses outside of the ad campaign.

As a result, it’s a more confined measure of how effective an ad campaign is.

Why Is Calculating Marketing ROI Crucial?

You can think of ROI as a kind of translation.

It turns anything (running ads, expanding a sales team, cutting an overseas department) into a single, common language—earning potential.

And with that common denominator established, businesses can then compare the earning potential of non-similar investments based on:

• How much revenue it's generating
• How high are its expenses
• What is the earning potential if given a budget increase

Businesses can then make more informed decisions about what to invest in and what to cut.

Now when it comes to marketing specifically, calculating ROI doesn’t just translate your value into terms stakeholders can understand.

It also:

• Proves your marketing efforts are having a real, tangible effect on revenue
• Opens the door to easier budget increase conversations
• Highlights high-performing marketing initiatives you can readjust budget into to maximize performance
• Helps you spot weak points or low-performers to cut out entirely

How Do You Calculate Marketing ROI?

You can calculate marketing ROI with a variety of methods:

• Simple Marketing ROI
• Lead Volume Marketing ROI
• Lead Value Marketing ROI

Simple Marketing ROI

The easiest way to calculate marketing ROI is with this simple formula:

[(New Sales Growth - Marketing Cost) / Marketing Cost] X 100 = Marketing ROI

So if we have a campaign that cost $20,000 to run but resulted in $50,000 in new sales growth, we could calculate marketing ROI like this:

[($50,000 - $20,000) / $20,000] X 100 = 150% Marketing ROI

However, this method assumes that all sales increases are the result of the company's marketing activities rather than an increasingly effective sales department.

For an even more accurate measure of marketing ROI then, marketers must also account for organic sales growth.

[(Sales Growth - Organic Sales Growth - Marketing Cost) / Marketing Cost] X 100 = Marketing ROI 

So let’s say a company saw an organic sales growth of 6% during this period. That means 6% of the revenue generated (6% X $50,000 or $3,000) was likely from the more effective sales department.

This more accurate marketing ROI equation would now look like this:

[($50,000 - $3,000 - $20,000) / $20,000] X 100 = 135% Marketing ROI

That being said, even this model has its problems. Specifically, it puts the value of marketing on sales made, not on leads produced.

And that means an ineffective sales team can actually hurt your marketing ROI—not good.

Plus, if you’re running multiple campaigns, you can’t tell which sales should be attributed to which campaign—doubly not good.

Lead Volume Marketing ROI

For an even more accurate way to calculate the marketing ROI of individual campaigns, consider the number of leads produced using this formula:

{[(Number of leads x Lead-to-Customer Rate x Average Sale Price) – Marketing Cost] / Marketing Cost} X 100 = Marketing ROI

Let’s break down this formula:

• Number of Leads: How many people converted into a lead. They took interest, took action, and clicked on a CTA.
• Lead-to-Customer Rate: How many people went from a lead to a customer. So, if 20 out of 100 leads became customers, your lead-to-customer rate is 20% or 0.2.
• Average Sale Price: Average price of your product.
• Cost for Marketing: The total amount you spend on your marketing campaign.

Let's run a quick number scenario for you:

You get 700 leads, and 25% of them (175) convert into customers.

On average, each customer spends $50.

Finally, it costs you $2,300 to market to those leads.

So, going by our formula, we would calculate marketing ROI with:

{[(700 x 0.25 x 50) – $2,300] / $2,300} X 100 = 280% Marketing ROI

With this formula, as long as you know how many leads were produced, the lead-to-customer conversion rate, and the average purchase price, you can break down your ROI at the individual campaign level.

Lead Value Marketing ROI

Last but not least, the best method of calculating marketing ROI is by determining lead value.

Average sale price (used in the previous formula) is a good starting point. But because sales is still in the picture, the formula still connects your marketing ROI with factors outside your control.

But when you attach value to individual leads before they’re sent to sales, you avoid that problem entirely.

When you have complete insight into the value of each of your leads, the marketing ROI calculation is simple:

[(Total Lead Value - Marketing Cost) / Marketing Cost] X 100 = Marketing ROI 

At WhatConverts, we believe leads themselves have value.

Which is why WhatConverts created all the tools marketers need to not just qualify leads, but also value them based on their quotable value or sales value.

Then, you can run reporting on that lead value data to see the total value generated for each one of your campaigns, specific keywords you’ve targeted, value by source and medium (Google, Bing, organic, PPC, etc.), and more.

For instance, say you’re handling the marketing for a plumbing company, and you’re running campaigns targeting three services:

• Emergency sewer repair
• Drain cleaning
• Sink installation

In just a few clicks, you can create a single report showing total lead value generated comparing each of these campaigns.

Then, just plug those values into the formula to get a highly accurate marketing ROI calculation.

Pretty cool.

What Is a Good Marketing ROI?

It’s worth noting here that “good marketing ROI” is highly subjective. It depends on a wide range of factors, like:

• Your industry
• Your unique target market
• Your marketing goals (brand awareness vs. lead generation vs. customer loyalty)

And in fact, an exceedingly low marketing ROI (say 1:1) may be worth it to accomplish certain strategic goals—like dominating brand awareness and market share.

But as a general rule of thumb, a 5:1 marketing ROI ratio is considered good.

An outstanding ROI would be closer to 10:1.

If your goal is purely based on generating revenue, the lowest generally acceptable marketing ROI is 2:1. Anything lower than that will likely be pushed closer to 1:1 due to overhead and unforeseen costs.

Challenges to Calculating Marketing ROI

The main challenge in calculating marketing ROI comes from basing marketing ROI on sales growth. And that’s because there is a separation between marketing and the final purchase.

To explain, marketing’s job is to turn strangers into quality leads. Those leads are then passed on to sales, which ideally will convert them into customers.

However, there are a lot of unknowns that come into play at this point. And even the best leads may still end up walking away when all is said and done.

There are a variety of reasons this might happen:

• Sales reps may not follow up on the lead
• The demo/pitch may not be carried out well
• A rep may misunderstand the needs of the lead
• Product value may be miscommunicated

In the end, the typical measure of marketing ROI…

[(New Sales Growth - Marketing Cost) / Marketing Cost] X 100 = Marketing ROI

… can end up being torpedoed by an ineffective sales team.

As a result, some marketers base their ROI on short-term indicators like:

• Impressions
• Clicks
• Social media likes and follows
• Page views

These are what are known as “vanity metrics.” And they’re not a good measure of marketing effectiveness because they don’t directly impact your business's bottom line.

You can achieve millions of page views and thousands of likes. But if you aren’t driving quality leads that result in sales, none of it means a thing.

And if you are basing your marketing ROI on these metrics, it’s only a matter of time before clients will ask, “But what’s the revenue tied to these metrics?”

Instead, you need to be calculating your marketing ROI based on lead value.

And that’s where WhatConverts can help.

How WhatConverts Helps You Calculate Marketing ROI

WhatConverts was built so that marketers like you have everything they need to easily calculate their marketing ROI based on lead value.

Here’s how it helps.

• Track Everything – Automatically track all lead types (calls, forms, chat, ecommerce) from all your marketing sources and mediums. And with that data, you can be sure every lead you generate is accounted for in your marketing ROI.
• Streamlined Lead Qualification & Valuing – Individual lead data like full customer journey, call/email recording and transcripts, and keyword spotting help simplify lead qualification and assigning value (quotable and sales) to individual leads.
• Easily Spot Waste – Robust reporting makes it easy to see which of your marketing efforts have produced the most value and which are eating away at your budget, all clearly communicated in total lead value. Plus, reports can even be customized to show the exact metrics your stakeholders are interested in.
• Feed Quality Data Back to Google Ads – Our native Google Ads integration lets you send only specific conversion data back to Google Ads. For instance, you could send back only high-value lead data to Google, letting you train the algorithm to optimize your ads for that specific lead type.
• Optimize Your Optimization – With Lead Intelligence, you can score, qualify, and action leads automatically. Lead Intelligence is also capable of sending conversion data back to Google Ads based on rules you set up, allowing you to continuously optimize your campaigns touch-free.

Wrapping Up

Calculating marketing ROI accurately can be a bit of a challenge, especially when you use some of the simple formulas to do so.

Plus, your ROI can easily get dragged down on the sales side.

Instead, lead value should be the basis of your return on marketing investment calculations.

And with WhatConverts, you have everything you need to easily and accurately see the true marketing ROI of your efforts.

Start your free 14-day trial of WhatConverts and uncover your true marketing ROI today!