How many times would you spend $1,000 to make $5,000? The answer should be as many times as you can. This cost-to-income relationship is called your Return on Investment (ROI).
To determine if your marketing is working, you can look at it a couple different ways. Are your targeted campaigns reaching their goals? Are they generating awareness, traffic, or sales? Some of these questions are harder to answer than others.
The most general way to look at it though is like this: does your marketing effectively generate business in a profitable way? That’s the bottom line. Marketers need a simple way to know if their efforts are creating business.
What’s a Good Marketing ROI?
The traditional way to calculate ROI is this formula:
(Attributable Sales Growth – Marketing Cost) / Marketing Cost = ROI
However, this is a tricky formula for marketers because it can be difficult to directly measure costs and attributable growth when it comes to your marketing efforts.
Furthermore, your ROI will be different for each campaign you run, so having to figure out these numbers per campaign can be time consuming.
Instead, it’s easiest to use a simplified formula of Revenue to Cost Ratio. Ratios are easy to calculate and understand, and they’re easy to apply across different campaigns.
How to Determine Revenue-to-Cost Ratio
The revenue-to-cost ratio tells you how much money is made for every dollar spent on marketing. In the example at the beginning of this article, a return of $5,000 for $1,000 spent is a 5:1 revenue-to-cost ratio.
As luck should have it, a 5:1 ratio is a great benchmark for marketing. It’s the middle of the bell curve. A 10:1 ratio would be outstanding, but it shouldn’t be the expectation.
However, your target ratio will depend heavily on your cost structure and your industry. If you sell low-margin products or services, expect your target ratio to be higher since you’ll need to stretch your marketing dollars further to see a good return.
What Counts as Marketing Costs?
Your costs associated with any marketing campaign should include anything you pay to execute the campaign:
Pay-per-click ad spend
Display ad spend
Content production costs
Include any costs for subcontractors who may produce deliverables like ad graphics, videos or copy
Do not include any full-time personnel costs
Media spend (boosted social media content, airtime, etc.)
Barge Marketing is Here to Help
Whether you need help determining the effectiveness of your existing marketing efforts or you’re looking for help building your next campaigns, Barge Marketing is here for you. Our top-down approach to marketing begins with a full assessment of your business, your product and your audience, and we build campaigns that suit your individual needs. Contact us today to see how we can help you!