How to measure marketing ROI

The ROI formula

In words, marketing ROI is the return from marketing minus the cost of marketing, divided by the cost of marketing. The result is usually shown as a percentage. If the return is larger than the cost, ROI is positive; if it is smaller, ROI is negative.

You may also see ROAS, return on ad spend. ROAS compares revenue from advertising with the money spent on the ads themselves. It is useful for judging campaigns within an ad platform, but it leaves out other costs, such as management fees, design and tools, and it usually uses revenue rather than profit. ROI is the broader business measure; ROAS is a narrower campaign measure.

What counts as cost

Include everything you spend to produce the results you are measuring.

• Advertising spend paid to the platforms.
• Agency, freelancer or consultant fees.
• Software and tools used for the marketing.
• Content, design, photography and video.
• Printing, sponsorships and event costs, if they are part of the campaign.
• The value of staff time spent on marketing, if you want a complete picture.

Leaving costs out makes ROI look better than it is. If you are comparing channels, try to assign costs to each one as fairly as you can.

What counts as return

The simplest return is revenue from customers that marketing brought in. A more accurate measure is gross profit: the revenue minus the direct cost of delivering the product or service. A sale with thin margins contributes less than a sale with healthy ones, even if the revenue is the same.

Decide in advance which sales you will count. For example, you might count customers who came from a tracked call, form or booking, or who said they found you through a particular channel. Be consistent, so results can be compared over time.

Long sales cycles need extra care. If customers take a while to decide, or contracts are signed long after the first inquiry, the return from this period's marketing may arrive in a later period. Track inquiries by when they arrived and follow them through to the eventual sale, so the return is matched with the marketing that produced it rather than whatever ran most recently.

Customer lifetime value

For many local businesses, the first sale is only the beginning. A customer who returns, renews or refers others can be worth much more than their first purchase. Customer lifetime value estimates the total gross profit a typical customer brings over their relationship with you.

Using lifetime value can change your conclusions. A channel that looks unprofitable on first purchases may be worthwhile if the customers it brings tend to stay. Start with a simple estimate from your own records, such as average purchase value, how often customers buy and how long they tend to stay, and refine it as you learn more.

Attribution's role

To calculate ROI by channel, you need to know which channel deserves credit for each customer. That is attribution, and it is never perfect. Customers often see several channels before buying, some contact you offline, and tracking misses some steps.

Use a consistent approach, combine tracked data with what customers tell you, and look at overall results alongside channel reports. If total profit from marketing rises while individual channel numbers are uncertain, the overall picture still matters.

A worked example

This is an illustration only, not a benchmark. The business and the numbers are hypothetical and rounded to make the method easy to follow.

On first sales alone, this hypothetical campaign returns a little more than it costs. If the business knows that customers typically come back several times, the lifetime return is higher and the campaign looks considerably better. If some of the ten customers would have found the business anyway, the true return is lower. The method stays the same; the assumptions are what you need to examine.

Use ROI to compare options rather than as a single verdict. Calculate it the same way for each channel or campaign, look at the trend over several periods and combine it with what you know about the customers each channel brings. A channel with a modest ROI that brings loyal customers may deserve more support than one with a higher ROI on one-off sales.

Common ROI mistakes

Many ROI errors come from what is left out or counted twice. Watch for these.

• Counting revenue instead of profit.
• Leaving out fees, tools or staff time.
• Judging long-term channels, such as search engine optimization, too early.
• Ignoring repeat purchases and referrals.
• Crediting every sale to the last channel the customer touched.
• Comparing periods with different seasons or circumstances without noting it.
• Treating ROAS from an ad platform as if it were business ROI.

Frequently asked questions