What is ROI?
Return On Investment (ROI) is a term that you have probably heard thrown around a bit in business and marketing spheres. It means, quite straightforwardly, how much money you have returned from an investment. It is used to describe any investment, but we are particularly concerned about the idea of marketing as an investment.
Marketing as An Investment
One of the most important concepts to understand in marketing is that it is an investment, I.e. marketing should be returning you something of value. This isn’t always directly monetary, but at the end of the day that is what businesses live and die by. Plus, money is usually the simplest thing to understand. Brand Awareness and Market Perception are super important, but to keep it simple, let’s talk about a monetary ROI. You put money towards a marketing campaign, and you get money back – or at least that’s how it should be.
Some businesses will say, “well I understand it’s an investment, but I really can’t afford to more than X toward marketing”. While this may be true, it often tells me that the concept hasn’t been fully understood. Marketing, if done properly, WILL make you money and grow your business. What it comes down to then are other factors, such as:
Trust is so important in marketing world. When people only put forward a fraction of what they could invest, it’s usually because of trust. How can you trust that the marketing provider has your best interests in mind? They keep telling you that it’s a 6 – 12-month commitment, but for a small business that’s a huge risk. The fear of getting to the end of this period and not being in a better position than when you started is probably the biggest killer in marketing sales.
The skill and expertise of the provider are a big factor in the success of your marketing commitment. Not all marketing providers are created equal, but how are you mean to tell the good ones from the bad? Considering it is a fairly saturated industry where many providers with a basic understanding can woo you with technical jargon, this is a legitimate concern.
Understanding and Education
Your own understanding, and ability to provide transparent information about your business can influence your results. It is the responsibility of the marketing professional to walk you through choosing all the right metrics and strategising, but they only make up one side of the picture. Skewing your financials or not collecting the right information, intentionally or otherwise, will simply lead to inaccurate reporting.
Are your own expectations reasonable? If you’re wanting to increase the revenue of your business by millions, but are only willing to invest hundreds, then something may not quite add up.
So what does this all mean? You need to come up with a way to choose a provider who is:
- authentic and honest
- an industry expert, who can
- educate you and become personally invested in your business and
- set sensible expectations and achievable goals.
You have to be able to meet this provider halfway in being capable and willing to divulge relevant information and put forward a realistic investment. Easier said than done, right? However, we’re not telling you to put all your eggs in one basket. Your marketing efforts should be broad, we’ve seen certain channels change their algorithm, supressing previously successful marketing efforts, and businesses crashing down along with it. https://blog.hubspot.com/marketing/facebook-organic-reach-declining
So, How Much Should I Invest?
This question is a little like “how long is a piece of string”, but there are some statistics that can help us come up with a comfortable number.
Most successful, growing businesses invest between 8% and 12% of their revenue toward marketing.
So if you’re business that makes $1mil a year, that’s $80,000 – $120,000 per year.
Depending on how comfortable your business is with marketing, this might sound normal or this might sound like a lot. All we’re saying is that it’s industry averages. Note that these figures consider your spend across anything considered to be marketing. That’s radio, print, marketing software, marketing staff and of course any agencies you decide to hire. One interesting thing to consider is that you may think, “surely it’s cheaper to hire someone in-house”, but if you consider the wage of a full-time marketing member, this cost is actually pretty high. They’re just one person, with one set of skills. An agency can span a broad skillset, all-the-while being deeply ingrained in the industry and thus across the latest trends and best practices.
Whilst the marketing provider can come up with some standardised packages, this doesn’t do your business justice. Do you imagine that marketing for a local mechanic is different than that for an online store? Of course, and so a marketing package should be tailored to your business. The best way to look at it is from a budget perspective. Any marketing provider who knows what they’re doing can scale your marketing based on your budget, so the more you invest the better the result. We encourage to consider your current marketing efforts, look at your revenue and then come to the provider with a figure. The professional should then be able to work with you and eventually come up with a strategy on the best channels to achieve your business goals. The most important part is tracking your ROI to ensure that over time your marketing nets you a positive return.
How Do I Calculate My ROI?
Let’s start by giving an example. We’ll give you the simple version, and then a more complex version:
If you invest $400 per month toward a marketing retainer, and because of the additional sales you see a gross profit increase of $1600, your ROI is $4 made for every $1 spent, or 400%.
Formula for calculating your marketing ROI:
gross profit – marketing investment
Now imagine if between you and the agency you have nailed this formula. Imagine you could simple dial this up. Invest $4000 per month, and you might see $16,000 returned. It’s not always this straightforward, but as a rule of thumb it becomes a matter or scale. This assumes you are tracking where your sales are coming from, which is an important part of this process. Using Analytics tools your lead source can be tracked.
You cannot work out the ROI without blending some statistics on the marketing end with some figures on the business and sales end. Of course, ROI assumes that you are doing your due diligence on the sales end. It’s not totally the responsibility of the marketing agency to provide you with a positive ROI. You need to ensure that your sales conversion percentage is optimised. Otherwise, there are some additional metrics that we recommend you track, such as:
- average sale value (revenue/number of sales)
- lead value (average sale value/total number of leads)
That way, you can track the value of your campaign based on lead value. You will then need to find a way to improve your sales – assuming the agency is sending you qualified leads (leads that are actually viable sales prospects).
So two important take-homes to ensure that you’re able to calculate your ROI are:
Make sure you’re asking your successful prospects where they came from, if it’s not already tracked
Calculate your gross profit, by lead source
Know the Value of Your Marketing
All of this is about justifying your marketing spend. “How much marketing costs” is not the right question. You can get a marketing gig on Fiverr for $5, but you might be better off using that $5 note as kindling. In fact, poor, below-board marketing can actually be detrimental to your business. We recommend going with your gut. Choosing an honest, competent marketing provider (hint: like us – shameless self-promotion) is the only right choice. Set some business goals, work out a plan and decide on a budget that is relative to your desired growth. The next step is to take the plunge and have some patience while it starts working. Lastly, make sure your agency keeps you in the loop and work with them to calculate your Return on Investment.