How to Calculate Your Return on Investment (ROI)
Marketing managers like to joke around saying that only half of their marketing is really effective, they just never know which half… Well, that might be true, but one figure that we can absolutely quantify is our Return On Investment or ROI for a particular marketing campaign. Let’s cut to the chase and see how we can calculate our ROI with a specific example.
For this example, I will consider a fictitious client that decides to create a monthly eNewsletter and start a new Email Marketing campaign for his company. The following numbers are just average numbers, but you can simply plug in your own numbers to calculate the ROI in your particular case.
Let’s assume that each eNewsletter requires an average of 10 hours of work from initial concept to completion. This includes the combined time for the writers/researchers to come up with the articles, the designers, the programmers, and the project manager that oversees the project. To keep the numbers simple, let’s assume that they hire a marketing agency to produce the newsletter and the average hourly rate of everyone working on the newsletter at the marketing agency is $100/hr.
Of course, because they’re hiring a marketing agency, for this particular purpose they can ignore other possible in-house costs such us overhead, personnel time, etc. Since they are creating an eNewsletter, the content will need to be hosted on a server and they will need an Email Marketing System or company to deploy it to their customer database. Now, let’s just put all the numbers together:
eNewsletter Monthly Investment
- eNewsletter Production (Labor Costs): 10 hrs X $100 = $1,000
- eNewsletter Hosting: $50/month
- Email Marketing System: $50/month
Total Monthly Cost (per eNewsletter): $1,100
So far, the above costs represent the “Investment” or the “I” in ROI. Let’s now take a look at the “Return” side or in basic terms, the revenues that you can expect to generate from the eNewsletter.
Let’s assume that you send the eNewsletter to 5,000 leads in your customer database. From those 5,000 people, your “Open Rate” (that is people who actually open their email and see your eNewsletter) is 25%. That’s a good number to start from. So you have now 1,250 people that actually see your eNewsletter. But you haven’t made any money yet. Now we will estimate that from the 1,250 that read your eNewsletter, only 1% become customers. This is a very low number, but let’s just consider a worst-case scenario to see how we end up. So 1% of 1,250 is 12. Now we’re happy! You now have 12 customers that are contacting you so you can do some work for them!
But remember, our main goal is still to calculate our ROI, so somehow, we need to put a dollar figure to each customer. Let’s again assume that each new customer will spend around $1,000 over the course of the year working with your company. That would be your gross revenue from each customer. But we don’t care about gross revenues either. We DO care about PROFITS! At this point, you plug in your average profit margin. If you run an efficient company, you may enjoy at least a 25% profit margin. That is, for every $1,000 of revenue, your profit will be $250 on average. So back to the previous figure, from each new customer spending $1,000, you will net (or profit) around $250.
Now we have a lot of new numbers on the table so let’s get back to our drawing board:
- eNewsletter Total Database: 5,000
- eNewsletter Open Rate (25%): 1,250
- eNewsletter Conversion Rate (1%): 12
- Average Revenue per Customer Project: $1,000
- Profit Margin: 25%
- Average Profit per Customer: $250
Total Profit from Newsletter: $250 X 12 = $3,000
With all of the above figures, now we’re ready to calculate our ROI. The formula to calculate ROI is always the same no matter which project you want to calculate it for. Basically, ROI will be calculated by subtracting the (R)eturn minus the (I)nvestment and divided by the (I)nvestment.
So in our case, it would be: ($3,000 – $1,100) / $3,000 = 63%
The Return on Investment for your eNewsletter would be 63%. As you can see, in this particular case, it makes perfect sense for you to add a monthly eNewsletter to your overall Marketing Plan. But it doesn’t need to end there. You can apply the same formula to just about all of your marketing efforts. If you follow our “Multichannel Marketing” approach, you can calculate approximate ROI numbers for each of your marketing channels. This will not just let you see and keep track of which channels perform better for your company, but also calculate the Average ROI of all of your channels. Here’s a hypothetical example showing you a calculation of an average ROI for all marketing channels:
ROI Per Channel
- Email Marketing: 63%
- Video Marketing: 50%
- Company Website: 35%
- Organic SEO: 65%
- PPC Campaigns: 45%
- Print Ads: 25%
- Direct Mail: 10%
- Social Media: 30%
- Company Blog: 45%
Average ROI = Total ROI (368%) / 9 Channels = 41%
Keep in mind again that the above are just fictitious figures but you can easily calculate yours by plugging in your own numbers. Depending on your industry, you may target a higher or lower ROI. At MGR Consulting Group, we constantly work on marketing campaigns for a variety of clients. Some clients target a higher ROI than others. For example, one client may target at 10:1 ROI ratio, meaning for every $1 invested, they expect to get $10 in return. In more realistic numbers, a high-end resort in a hot travel destination may invest $50,000 in a certain promotional campaign, expecting to get around $500,000 in profits from such campaign. By the same token, other companies are just as happy creating branding campaigns with very low short-term ROI expectations. A small retailer may just spend $2,000 in a branding campaign that results in an equal $2,000 return or ‘break-even’ short-term’ ROI. However, even it that case, the campaign would be beneficial if it has provided additional branding and awareness among potential consumers who may –if not immediately- in the long-term become new consumers of your products.
You will also notice that, as you start tracking and analyzing your ROI for your different campaigns over a period of time, the actual ROI figure may also grow each time. Your first marketing campaign may break even; subsequent campaigns may bring you a 5%-10% ROI. As your branding increases and your potential customers start warming up to your company and your products/services, your ROI will also increase accordingly. Planning and consistency is the key. You can’t expect to send a single eNewsletter one month and get outstanding results. But if you stick to your long term plan and make adjustments along the way, your efforts will surely pay off.
As always, if you have any questions, feel free to contact me directly or add your comments below. Happy Marketing!
Until next time, this is Manuel Gil del Real (MGR)