ROI — or Return on Investment — is used to measure the rate of return that a marketing program or programs achieved for the money invested. The simple ROI formula is:
Net Profit / $ Marketing Costs
Getting to the Net Profit number takes a few steps . . .
So if your Marketing effort generated $10,000 in Net Profit, and you spent $50,000 on the effort, ROI would be: $10,000/$50,000 = 20%
In this example, you returned 20% on your Marketing investment.
Is that good? It depends on your company’s particular situation and its investment objectives.
- Could your company have taken the same $10,000 and invested it elsewhere to make more than a 20% return?
Consider also the Lifetime Value (LTV) of the customers you bring in from your 20% ROI Marketing program.
- Can they be expected to order repeatedly throughout the year?
- Can you expect a significant portion to continue ordering from you for several years?
If these customers have a significant LTV, then your company may be happy bringing them in at 20% ROI (or even much less than that).
So there’s not really any particular ROI that is “good” versus “poor”.
- If your Net Profit was $0, that could still mean that particular marketing program was successful. Many times, it makes economic sense to bring in customers at breakeven or even an initial loss, if you know they have a significant Lifetime Value.
For more on ROI and other metrics, see our Marketing Math slides