Just as there are many different forms of marketing — agency marketing, campaign marketing, referral / relationship marketing — there’s an equally diverse range of methods for calculating ROI on those initiatives. Depending on the size and scope of the specific campaign (or the wider time period you’re measuring), ROI calculation can require anything from simple arithmetic to juggling more complicated sets of equations.
With a full understanding of the different methods used to calculate ROI, your business or agency can earn new customers, build trust with your current clientbase, and keep your revenue in the black.
Michael Saba and Karissa Austin contributed to this post.
Basic ROI calculation / financial value measurement
At the root of things, ROI is derived from a pretty simple equation:
ROI = [Revenue earned] – [Cost of investment]
For example, if you buy a piece of property for $100,000, spend $15,000 refurbishing and marketing it, and then sell it for $150,000, your total ROI for the venture is $35,000.
This kind of basic ROI equation is commonly known as a ‘financial value’ measurement, and it represents what you’re ultimately trying to get at with any kind of ROI calculation: The overall dollar value returned by an initiative. But modern marketing techniques involve dozens and dozens of interlocking initiatives and touchpoints, so your ROI calculation will almost never be this straightforward.
First, you’ll have to decide whether you’re looking to determine ROI for a specific campaign (a relatively narrow timeframe), or whether you’re trying to establish ROI for a wider period of time encompassing multiple campaigns and initiatives. Then, you’ll need to figure out how your current ROI figures compare to previous ROI measurements in order to gain a truly complete picture of how your agency is performing.
It sounds complicated, and it’s a lot of information to keep track of, but we’re here to help: Here are some surefire methods you can use to calculate ROI, and the scenarios for which each of these differing approaches will be most useful.
Looking for a quick, hassle-free way to calculate your cost per lead so you can get on with measuring ROI? Read more about CallRail’s handy new CPL calculator.
ROI by Customer Lifetime Value
This is where things start to get granular — every data-driven marketer’s dream, right? We’ll start with measuring ROI by your average Customer Lifetime Value (CLV), which is the average amount of revenue an individual customer will generate across a lifetime of interactions with your business.
With this data, you can achieve a potentially eye-opening view of your overall performance. But first, you’ll need to figure out exactly how much you’re spending to attract paying customers: Your Customer Acquisition Cost (CAC).
Start by taking your overall expenditures for a campaign, and then divide that figure by the total number of new paying customers earned by that initiative:
Customer Acquisition Cost = [Marketing spend] / [Total number of new paying customers]
Now comes the tricky part: Figuring out the average lifetime revenue that customer will generate for your company, or their Customer Lifetime Value (CLV).
As a general rule of thumb, you can use the following figures in order to calculate CLV:
- Average purchase value per customer over a given period (usually yearly)
- Average frequency of purchases in that period
- Average customer value (avg. purchase value multiplied by avg. frequency)
- Average customer lifespan (number of years a customer makes purchases)
You can then estimate your CLV by multiplying the average customer value by the average customer lifespan.
If your customers tend to only buy once, or make purchases very sporadically, then you may find that determining CLV isn’t all that helpful for figuring out your overall ROI — in cases like this, it’s usually better to stick to average customer value when making your calculations.
However, if your customers tend to buy multiple times or make payments via recurring subscription services, it’s worth the extra effort to calculate CLV and use that instead. And when you subtract CAC from CLV, you’ll have a great yardstick for measuring the effectiveness of your marketing efforts, and the overall health of your business.
ROI by project or campaign
It’s critical to properly account for all of your marketing expenses when determining ROI, which is why measuring on a per-project or per-campaign basis is one of the preferred methods of ROI calculation. But there’s lots of data to consider when calculating a project’s ROI, so it can be easy to find yourself struggling to make sense of your analytics.
Keep it simple by sticking to the following mission-critical variables for your initial ROI equation:
- The type and quantity of personnel required by the project
- The number of work-hours required to complete the project
- Personnel costs and wages
- Capital costs (i.e. equipment/hardware costs and software costs)
By breaking down your expenditures for personnel and equipment — and then weighing that against an itemized list of the tasks required to complete a project — you’ll have a good understanding of just how much your campaign has earned. (For this, it’s very helpful to use something like the Gantt Chart methodology to properly organize and streamline the project-management process.)
Start by listing out the individual tasks in a campaign, and then assign each task its overall cost, like so:
- Task 1: Paid display ads ($5,500)
- Task 2: Web redesign and landing pages ($3,500)
- Task 3: Email marketing blast ($500)
- Task 4: SEO optimization ($1,500)
In this example, the total expenditure for the project was $11,000. If there’s any ambiguity about how much something costs, always estimate higher in order to avoid unpleasant surprises down the road.
From here, we take the overall revenue the campaign has brought in — let’s say $55,000 — and then use that to determine your overall ROI. According to these figures, our campaign earned a $44,000 ROI, or a 500 percent return on investment. (That’s squarely in the middle of the 5:1 sweet spot recommended for marketing ROI.)
For some campaigns, success is measured in conversions that will turn into revenue later — think lead form submissions, newsletter subscriptions, and so on. But it’s still important to ascribe a dollar value to each conversion because, while these calculations aren’t exact, they at least enable you to get a general idea of how much money your hard-won conversions will bring in.
Another variable worth considering is how long it will take your marketing campaign to begin showing results. If your product or service has a high price point, your sales cycle is likely considerably longer than, for example, an e-commerce clothing company. Alternatively, you may find that the sales cycle for leads you gain at tradeshows is usually much shorter than those generated through digital channels (or vice versa).
In either case, take a look at your historical data to determine your sales cycle length before running ROI calculations. That way, you can be sure you’re giving your campaigns enough time to generate revenue before you measure them.
Hammering out these figures and variables can be one of the toughest parts of measuring overall ROI, but it’s worth it: Per-campaign ROI shows you exactly how much value your initiatives are generating. These calculations become even more useful when you expand your analysis and use campaign ROI to inform deeper and more complicated ROI calculations.
But which campaign ROI calculation should I use?
Here’s where we get into the real nitty-gritty: We already know we want to figure out our ROI on a per-campaign basis, and we’ve familiarized ourselves with the different methods we can use to calculate campaign ROI. Now it’s time to figure out exactly what kind of equation we’re going to use.
1) Your campaign is optimized for one-off sales
In this situation, you can stick to the simple equation for ROI percentage:
ROI = [Revenue – Marketing Spend]
Example: You run a Facebook ad campaign promoting your new jewelry line. You earn $5000 in revenue and spent $2000 on the campaign. Your ROI is then (5,000 – 2,000): $3,000 or 150 percent.
2) Your campaign is optimized for non-monetary conversions that will turn into recurring sales
Similar to the situation above, you’ll want to assess how much money you stand to make based on customer lifetime value, instead of just one-off revenue. Find your customer acquisition cost first using the equations mentioned above, and then use these figures to calculate ROI:
ROI= [Customer Lifetime Value – Customer Acquisition Cost]
Example: You run a beauty products subscription service and conducted a direct mail campaign to get new subscribers. You spent $5,000 on the campaign materials, and earned 50 new subscribers as a result, making your customer acquisition cost (5,000/50), or $100. Your customer lifetime value is $200, so your ROI stands to be 100 percent.
3) Your campaign is optimized for non-monetary conversions that will turn into one-off sales
Here, you can still use the original ROI equation, but you need to determine both your estimated ROI per customer and your sales conversion rate. First, calculate your lead acquisition cost and ROI per lead:
Lead Acquisition Cost = [Marketing Spend / Total Leads]
ROI per lead = [Average Purchase Value – Lead Acquisition Cost]
Next, determine your forecasted revenue, based on your lead-to-customer conversion rate:
Forecasted revenue = [Total leads * Sales Conversion Rate * Average Purchase Value]
And finally, plug these variables back into the regular ROI formula:
ROI = [Forecasted Revenue – Marketing Spend]
Example: You sell MRI equipment to hospitals and purchase a booth and sponsorship at a large trade show where your goal is to generate leads. You spent $100,000 on the sponsorship and earned 200 leads, giving you a customer acquisition cost of $500. If your average purchase value is $250,000, you could expect an ROI per lead of (250,000-500), or $249,500. If your lead to customer conversion rate is 5 percent, then you can expect 10 of those 200 leads to become paying customers, earning you $249,925*10, or $2,495,000 in forecasted revenue. Since you spent $100,000, that leaves you with an ROI of .025 percent.
What about attribution for multichannel campaigns?
As a marketer, you know that no campaign or marketing tactic makes money by itself. When calculating ROI for a marketing campaign, it’s important to decide in advance how (or if) you will factor in other touchpoints, and how much credit you’d like to give to them.
For example, if you’re running a single-channel direct mail campaign targeted at people who are unfamiliar with your brand, you can feel pretty confident assigning 100 percent attribution to that channel (especially if you use proper tracking methods). However, if you’re running a promotional campaign that spans direct mail, email, and Facebook ads, you’ll need to decide if you want to calculate ROI by overall campaign spend, and/or break it down by channel.
To a large degree, this decision will depend on your resources. In a multichannel campaign, a big-picture view of your marketing spend is definitely the easiest to achieve, but that wider perspective means that you might miss important information about which specific channels performed best. Conversely, breaking down the campaign by channel offers better insight, but requires more effort and resources.
What’s a marketer to do? At a minimum, calculate your ROI based on overall marketing spend. Doing so at least allows you to answer the question your stakeholders want answered most: Did this campaign generate revenue? From there, you can select an attribution model that can help you determine which channels contributed most to your ROI.
For more tips on attribution for multichannel campaigns, read our explainer on how to analyze a marketing touchpoint.
ROI percentage over time
Armed with your per-campaign ROI, plus your CAC and CLV, you’ll have the data you need to do truly granular and in-depth ROI calculations that prove the exact value of your marketing. Now that we’ve done all that number-crunching, the final frontier in ROI calculation is (relatively) easy to figure out: The total ROI earned during a given period of time.
Basic ROI calculation can give us bottom-line figures for a specific campaign, but it’s less useful when you want to compare historical trends and see how your current efforts compare to your previous work for the client. (Or better yet, how your work compares to the period of time before your client signed on with your agency.)
Let’s say that you’ve been running Campaign A for two years, which has earned an eye-popping ROI of 750 percent. Those are impressive figures, which might make you think that Campaign A’s methods should be replicated across all of your other initiatives. But also consider Campaign B, a newer initiative that has only been running for 3 months, and has earned a somewhat more modest ROI of 250 percent.
On a purely surface-level analysis, Campaign A appears to be the clear winner, since it had a nearly 3 times greater ROI percentage. But when we consider that it took Campaign A 8 times longer than Campaign B to achieve those ROI figures, that accomplishment suddenly looks less impressive. Depending on your outlays, Campaign B may actually be a far more cost-effective use of your marketing dollars than Campaign A!
This is just one example of how careful analysis of your marketing data can yield surprising insights that have a big impact on your bottom line. By taking this broad and all-inclusive view of ROI, you can see where you’re winning, where you’re struggling, and exactly how your marketing fits into the bigger picture.
Want to know how much ROI you’re earning from phone call conversions? Learn more about how CallRail makes that data quick and easy for marketers to use.