A key performance metric when evaluating a marketing campaign is return on investment (ROI). There are many misconceptions about how this metric is calculated. Some might think that if you spend $25,000 on a campaign and it brings in $50,000 in revenue, that they have gotten a 100 percent ROI.
However, this method doesn’t account for things like the cost of goods, your business’ expenses and other overhead factors. You want to calculate your ROI based on gross profit on the product/service you are selling, not simply revenue.
The simplest formula for calculating your marketing ROI is:
(Gross Profit – Marketing Investment)
So if you assume your business makes a 50 percent profit margin, and your marketing campaign brings in $50,000 in revenue you only have really made $25,000. Your ROI is actually 0 percent:
($25,000 – $25,000)
Use ROI to evaluate your marketing efforts
When things are tight, companies often slash marketing budgets. Without proof that it works, marketing can easily be written off as “unnecessary.” This can be dangerous since good marketing drives revenue. Accurate ROI measurements can help you identify which of your marketing expenses should be cut and which are driving business.