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Marketing ROI is a metric that helps companies determine the effectiveness of their marketing and advertising plans. ROI stands for return on investment, a measurement calculated by dividing the gain from a marketing or advertising program by its cost. This provides an incremental factor for measuring marketing gains. For example, a company spends $100,000 US Dollars (USD) on a marketing campaign that results in new sales of $375,000 USD. The marketing ROI is 3.75 for this particular factor; higher factors are preferred by companies.
The purpose of the marketing ROI calculation is to determine the historical effectiveness of marketing and advertising campaigns. Using this historical factor, companies can then predict the effectiveness of future marketing campaigns. For example, a company has a factor of 4.25 for every newspaper marketing campaign they run. If a new campaign costs $50,000 USD, the company can expect to earn $212,500 USD in revenue. This calculation does not necessarily mean the company will turn a profit for this time period.
Companies often use the marketing ROI calculation for short-term campaigns. This helps them decide on the best type of advertising medium for generating new business. Short-term campaigns are often targeted to a specific group or time frame for the business. Calculating the effectiveness of the expense is necessary to ensure the company can maximize its opportunities to generate sales. A comparison between multiple campaigns run at the same time is also possible using this metric.
Long-term marketing or advertising campaigns do not generally measure well with marketing ROI. Brand awareness, consumer popularity, and lack of competition can all affect a company’s marketing tactics. In most cases, there are only a few ways to track this information successfully. For example, the growth of a company’s brand may come from multiple short-term marketing campaigns and quality products sold through multiple markets. Rather than using internal information for determining brand popularity, companies often rely on customer surveys to gather information.
Marketing ROI is not without flaws. Using short-term figures to derive the effectiveness of operations can mislead a company into thinking their marketing was the top reason for increasing sales. Lack of competition, low supply of substitute goods, higher consumer wages, or the ability to enter new markets may be other factors of increasing sales. Failing to consider these factors along with ROI calculations can create a myopic view of marketing. Distorted revenue figures can also produce inaccurate ROI factors.