I don’t like to waste money – especially my hard-earned cash. This must apply to you as well, right?
Before any substantial investment, it’s best practice to understand what the potential and even likely returns will be. This helps you evaluate its worthiness – whether that specific project merits doubling down on or entirely shutting down.
As a marketer, you should be keen on measuring your return on investment (ROI). This is one crucial KPI (key performance indicator) that aids you in investigating your marketing strategy’s efficacy – effectively helping you adapt, amplify, or overhaul it.
So important is the measurement of ROI for marketers that statistics from the State of Inbound report that marketing departments who diligently calculate marketing ROI have a 160% higher chance of receiving the marketing budget they desire.
Why wouldn’t they? As a manager, you would be more enthusiastic about releasing money to a department that is accountable and directed – where results are documented and monitored by the numbers – not just a team dumping your money into the sea with no transparency and ways of measuring its success.
A good cash flow calculator should be optimized around the findings gained from calculating your marketing ROI. This will help you allocate where money should be flowing to achieve the best results.
A proper cash flow calculator like the one that was built for Smooth Sailing Business Growth and aimed at helping you to identify content marketing ROI can help you improve your budgeting many times over!
Important metrics to measure marketing ROI
To accurately calculate your advertising return on investment and consequently decide on cash flow, there are important metrics you should watch out for. These metrics stand out for the loads of actionable insights to be derived from them.
What more, these metrics objectively analyze your holistic marketing activities, not just emphasizing the sectors where you are performing excellently.
These crucial metrics are generally housed under two encompassing segments: channel performance and campaign performance metrics. So, how about we analyze them more carefully?
How well are your campaigns performing?
Marketers love campaigns – and for a good reason. But it is more important to measure the efficacy of implementation for these campaigns – especially when a sizable investment of time and money is going into these campaigns.
Here, you should be focusing on how well each of your marketing campaigns is performing. How rewarding are they in terms of the cost-revenue ratio?
Rather than just going on generic metrics like engagement (for social media) and open rates for emails, you should be striving for more actionable metrics like click rates in those emails and social media posts. You should also measure how well your customers are clicking the CTAs in terms of conversions.
Effectively, knowing how to calculate marketing ROI from campaigns (and hence structuring your cash flow) involves measuring metrics like the Cost Per Action (CPA), the customer’s Average Order Value (AOV), and overall sales lift. A good marketing ROI calculator should factor these in.
How well are your channels performing?
As marketers, we all agree to the exponential importance of the platform we choose for a marketing campaign. For example, it is fair to expect that a campaign targeting millennials with print newspaper ads will fail miserably.
Knowing how to create a marketing budget involves accurately measuring each channel’s acquisition capacity relative to the cost.
If a channel is not sufficiently driving acquisitions of first-time customers or struggling with customer retention, you may have a problem at hand.
To efficiently measure your marketing ROI from your channel performance, you should pay more attention to crucial metrics like channel reach, incremental sales conversions, business impact, or overall channel brand outreach.
With insights accrued from this, you can now better understand which channels are your best bet as a marketer and which, by comparison, you should slow your roll on.
What really is an attractive marketing ROI?
The truth is, the interpretation of what a good marketing ROI is, is largely subjective. Depending on the industry, organization, marketing objectives, and even marketers’ personalities, people have different expectations and opinions of what their marketing returns will likely be.
But if we were to set a definitive benchmark, we would say your marketing returns are impressive (or at the very least, fair enough) if you are getting five times your marketing investment. By the time you are getting ten times your investment, then you are really crushing it!
While the positive threshold is 5:1, it is vital to clarify that you should be considering closing shop (on constricting cash flow to that particular project) if you are not getting at least twice your investment (encompassing expenditures like creative production, distribution, and promotion).
How can marketers calculate ROI?
Most marketers today leverage a marketing ROI calculator to better allocate their budgets and know what is working for them and what isn’t.
Before using such marketing calculators, you must understand the computational basics of how an online marketing ROI calculator works.
Of course, there are dozens of ways to calculate ROI, featuring in a gazillion of parameters, but the very fundamentals involve your marketing cost and sales growth.
Simply put, your marketing ROI is what you get when you minus your sales revenue from your marketing costs and then divide that net amount by your marketing costs.
Sounds like rocket science? Alright, let’s show you what it looks like!
Marketing ROI = (Sales revenue-marketing cost)/marketing cost.
There are some exceptions to take note of when applying this formula. This formula assumes that your sales revenue is directly accruable from your marketing costs.
Therefore, this formula would be fairly inaccurate if you are accruing sales from organic channels where you are practically spending $0 on marketing.
To better adjust this formula to such scenarios, you would have to further subtract the total amount of organic sales from the net amount you had previously when you subtracted your marketing costs from your total sales revenue.
Let us represent this mathematically again, shall we?
Marketing ROI = (Total sales revenue – marketing cost – total organic sales)/marketing cost
Take note that the marketing cost is very different from your total overhead cost. The marketing cost is strictly that slice of your operational costs that were exclusively spent on marketing activities.
Therefore, employee payroll, for example, doesn’t fit into this.
Similarly, your sales revenue is different from your total revenue as a marketer.
I wouldn’t deny that many free investment calculators tend to use sales and revenue interchangeably, but a bit of specificness in this circumstance wouldn’t hurt.
Your sales revenue is the net between your total revenue and your non-operating revenue. As marketers, we tend to earn quite a bunch of dollars from side hustles.
For example, dividends accrued from an investment in company B will not feature in your sales revenue for company A’s marketing ROI that you are measuring.
Ultimately, your sales revenue is the net revenue that would be documented on your income statement. This is directly derivable from payment for your services or payment for goods sold.
Do you get it?
Analyzing your cash flow from your marketing ROI
As said, when you are more accurately informed on the returns on your marketing activities, you are in a better position to allocate cash flow for the various sectors of your business.
This way, you have a clear picture of how much should go to campaigns, what channels these campaigns should be run, and how much should be allocated to the day-to-day running of your marketing business.
This clarity and specificity in allocation can prevent ugly scenarios where marketers run out of cash while mid-operation. It will enable you to meet your financial obligations punctually and with confidence.