Measuring Return on Investment (ROI) in a small business

In this article, we’re going to share with you what Return on Investment (ROI) is, why it’s important and how to use ROI measures to grow your small business

At Ketchup Marketing, we’re interested in all things innovation. Whether you’re looking for a local branding agency or an email marketing campaign designed to engage even the busiest of customers, we’re here for you. Despite our creative nature, however, everything we do is focused towards results – your results.

Our enthusiastic team of strategist marketers know how vital it is to measure your Return On Investment (ROI) when spending crucial funds on your marketing campaigns.

This article takes a comprehensive look at what ROI means in the area of marketing, and how our team of creatives at Ketchup Marketing can help you ‘ketchup’ with the terms and concepts involved. 

Why do marketers use ROI?

From encouraging consumers to stay loyal to particular brands of food to reaching a new target demographic, marketing – and the way products and services are sold – has a huge influence on our buying behaviours and everyday routines.

Without effective promotion them, many businesses struggle to put their name and brand in front of the right people, and, realistically, have little to no chance of surviving in today’s competitive market. 

But, there’s more to marketing than creating a catchy slogan and designing a unique logo. In fact, marketing is everything that a business does to earn customers and cultivate a relationship with them.

It is not an exact art and can often be challenging to quantify, but it is vital for a company’s success. Like most things in the world of business, everything (including marketing) comes down to figures and money!

The biggest question companies have about their marketing campaigns are usually about what return on investment they’re getting for the money they have spent.

What does ROI in marketing mean?

The phrase ‘Return on Investment’ or its acronym ‘ROI’, is something that is regularly referred to in the finance and investment sector but is, in fact, relevant to all business-related matters.

Its importance in the world of marketing is crucial too. In the world of marketing, calculating ROI is a way of quantifying the investment a particular marketing strategy has brought to your business. It’s a handy tool for all businesses, including us at Ketchup Marketing.

At its most basic, your business’s marketing ROI shows how much return (extra profit) your business got on its investment (marketing spend).

This can be from either the reduced costs from the promotional spending or, most likely, the additional revenue gain. These two factors are often combined, however. 

This calculated figure is then put against the costs associated with running the marketing campaign. In other words, you will end up with a positive ROI figure if you make more money than is spent on costs, and have a negative ROI if your costs are higher than the reduced costs or additional revenue gain.

How is ROI calculated?

We’ve just explained a very simple version of the premise behind marketing ROI, but it can actually get a lot more complicated than this, especially with marketing because there are many cost and return factors that have to be examined.

We know that calculating ROI can seem like a tricky business, but if you want to judge the success of your promotional spending with real stats and figures, working out the return on your financial investments has to be done. After all, if we hadn’t calculated that our average ROI for our clients in 2018 was a whopping 603%, we wouldn’t be able to show off about it!

Let’s look at the costs and returns that you may need to consider to calculate your business’s marketing ROI.

Cost factors (Investment)

These are the all-important cost factors that you need to consider:

Functional Expenditure – These are the actual campaign costs, such as staff wages for people working on the campaign and the dissemination of marketing materials. Other costs in this heading include related business expenditure, such as printing costs, technical costs (e.g. email platform subscriptions and website coding), management time and the cost of sales.

Creative Expenditure – These are costs incurred by the creation of brand identity and the conception of marketing ideas. It can also cover the actual work gone into the decision-making process and how the campaign is put into action.

Supplementary Expenditure – These are marketing costs that are not foreseen when planning a campaign. They can also refer to costs incurred by new marketing information or changes to business practices that are caused by the results of certain marketing campaigns.

Return factors

These are the return factors that should be considered:

Immediate Returns – This is the most visible and sought after return from a planned marketing campaign; an increase in sales and contracts acquired as a direct result of the marketing activity. Immediate returns are effective money in the bank but are not the only benefit, however.

Changing Perception Returns – We all know that the main aim of marketing is to make money. But, for some clients, immediate sales gains aren’t the primary goal.

By playing a longer game, a clever marketing campaign can change a customer’s perception, opinion or knowledge of a company with the expectation that this will convert into sales in the future.

This can take the form of making the audience aware that your company sells a certain product or service, causing the customer to consciously or subconsciously like your company, or even just literally making them aware of your existence.

As valid as this type of campaign is, it is problematic for ROI calculations. The effectiveness of an awareness/perception strategy can be hard to judge because its success is often in the future and it’s tough to directly attribute the change in perception as the cause of a sale.

Future Business Returns – The other returns factor to be aware of is the potential for sales in the future from the audience attracted by the marketing spend.

This is easy to miss out when working out your ROI as again its effects are not immediate and quickly identifiable. You should also remember to factor in referrals and recommendations generated by new leads when working out this figure.

How to calculate your own marketing ROI

Here we get down to the nitty-gritty – it’s time to dig up all those memories of GCSE maths!

As we’ve discussed, ROI is a basic measure of profit gained from an investment. It’s calculated as a percentage and in simple terms, it is measured like below. 

(Sum of Returns – Sum of Investments) / Sum of Investments

As we have talked about previously, ROI calculations are often far more complex in the marketing sector than in other areas, as there are so many variables both on the cost side and the returns side.

To help corral some of these variables, there are a number of different formulas you can use to bring hard facts and realistic data to a tricky area.

1. This version of the ROI formula above is based on the gross profit of units sold in the campaign and the marketing investment for the campaign. It will give you a percentage return on marketing costs:

(Gross Profit of Units Sold – Marketing Costs) / Marketing Costs

2. The Customer Lifetime Value (CLV) is a measure of profit earned by a customer or customers since the start of your relationship with them. It is usually worked out as the net present value of the profit that you have earned over all the customer’s purchases with you over time. 

It is a very useful tool for the marketer and can help your business in several areas, including:

• Customer acquisition – by showing you what to spend to gain customers
• Single customer profitability – by helping you calculate the profitability of a single customer
• Customer targeting – through knowledge about which customer segment brings the most return for your company
• Customer retention – by showing how much your business can spend to keep customers profitably

By using Customer Lifetime Value in your marketing ROI calculations, you’ll have a much more precise measure of how well your marketing campaigns have performed.

(Customer Lifetime Value – Investment) / Investment

3. Another ROI marketing formula you can employ is one that takes into consideration your expenses. 

(Profit – Marketing Investment – Overhead Allocation – General Expenses) / Marketing Investment

ROI – The key factors you should know

As it is challenging trying to work out what your true investment is when calculating your ROI, the key factors to be aware of could include: 

Total Revenue – This is obviously the total amount of money generated for a marketing campaign before any deductions. It is the top line on your sales generated.

Gross Profit – This important figure is the revenue gained from your direct marketing activity minus the cost of goods sold to create or deliver a product or service. Many business marketing people just use the company’s Cost of Goods Sold percentage and subtract it from the total revenue.

Net Profit – Net profit is simply your gross profit generated by your marketing spend minus the expenses incurred.

The different factors used in working out your marketing ROI can vary for each business or organisation, but with accurate ROI figures, your company can target marketing efforts that bring you the largest return. 

Why use marketing ROI measures in a small business

Undertaking an ROI calculation after your marketing efforts helps you justify their expense.

Marketing is undoubtedly a huge component of a successful business yet because of the difficulty in attributing sales or success to a campaign,  it is often the first area to be slashed when a company’s profits fall. This is a highly illogical step as marketing is an investment to create revenue – yet it still happens.

Doing an ROI review on your marketing efforts is a method that produces hard evidence of its importance while banishing the idea that some people have of marketing as an unnecessary expense.

In an ideal situation, you should measure and track the ROI on all marketing activity so that you can get the highest possible returns by knowing where to target and what is and isn’t successful. For example, we at Ketchup Marketing ran a new client’s first email campaign which netted them an additional £19,000 of sales revenue. With results like this, you’ll know what channels or message is effective and your entire business can understand why marketing is important as there is evidence to back it up.

If your company does no ROI calculations, you are effectively shooting in the dark with your marketing spend. Because of this, you have no idea what works and your budget will be the first thing that is cut when the business runs into tough conditions.

As a small business, you can’t afford to waste money on ineffective marketing but you can’t afford to not invest money in marketing to grow. This alone is why employing marketing ROIs in a small business is essential.

How to prepare for your marketing campaign and your ROI calculations

We have established how measuring the ROI of your marketing campaigns is very important, but how you do it is even more so. If your company’s sales process is short and simple you can keep your calculations simple. If it is long and intricate, however, you should try your hardest to include as many factors as possible. 

Get your figures

Acquiring the figures from your business and marketing efforts is the first thing that you should do before embarking on your ROI calculations.

Cost of goods sold (COGS) – This is the expense of actually physically producing the service or product.

Marketing cost – This is, as you would expect, the cost of the marketing campaigns you have performed. You can choose whether or not to include the price of the work hours your particular employees invest or the costs of production.

Sales or contract revenue – This figure can be tricky to acquire – especially if you have multiple campaigns and a rather extended sales process that makes attribution difficult. As this task isn’t easy, you may wish to enlist the help of your finances department for accurate figures. It is also worth ensuring the figures and calculations that you use are the same as the rest of your company.

Set a ROI threshold

You should always set a ROI goal for each marketing channel or campaign as well as your entire marketing budget – but you should also set a minimum threshold too.

If a campaign you are planning won’t hit your set threshold then you should know not to run it. This way vital business money will only flow to the most deserving channels.

Certain areas of business are easier to quantify than others; this is one of the reasons why we at Ketchup Marketing are experts in Pay Per Click (PPC) services. With over 20 clients on a retained PPC basis, we are able to attract massive traffic to our clients’ websites – and know exactly how successful our campaigns are.

Set a marketing budget

Now that you have made a ROI goal and a revenue goal, you can work out how much funding you should invest in marketing. By using the correct formula you can have a very good idea if you are spending the correct amount of cash to meet your stated goal. 

To do this, you just need to work backwards. If you want revenues to grow by £1000 and you have a target ROI 300% (i.e. for every pound you spend, you make £3 extra revenue) then you can expect to spend £3000 on marketing to generate your extra £1000 revenue.

Tracking your campaign for improvements

Keeping an eye on data and understanding it can be very challenging during intricate marketing campaigns. If you are vigilant with your reporting processes however, you can stay on top of it, even if you do have to make some small estimates where data is hard to ascertain.

By doing this, you can see what is working with your marketing efforts and what is not, and manoeuvre your marketing activity and the funds supporting it into more productive places.

We at Ketchup Marketing offer tracking on a monthly basis that allows us to keep a keen eye on your results so that we can make the necessary tactical changes to maximise your ROI.

We are always keen to explore new and exciting marketing avenues, such as our recent foray into exhibitions with our Self-build & Design show with our client Stamford Stone. This eye-catching event based in Peterborough was the perfect event to successfully track our ROI with our data collection techniques.

Afterwards…

By constantly working out the ROI before, after, and during marketing campaigns, you can boost your sales now and in the future. This will also ensure there is hard evidence that your marketing budget is worth every penny your company spends.

What is a good marketing ROI for a small business?

As we finish up here, let’s consider what you might target as a good ROI for your small business marketing.

At the very least, you need to cover costs. Keeping the maths simple, if you generate sales of £1000 and your profit margin is 50%, then your £1000 of extra revenue equates to an additional £500 of profit. In this case, you should never spend more than £500 for an extra £1000 of revenue because your profits will go down. Therefore, your breakeven ROI is 200% (derived from 1000/500).

At a 300% ROI, you’ll generate £1,500 of sales, which is £750 of profit, for your £500 spend on marketing. This is a win, and a good place to set your minimum threshold for ROI.

As a very simple rule of thumb, 300%-500% ROIs (3:1 – 5:1) are where you should be pitching your marketing returns. If you’re achieving more than that, you should probably be spending more on marketing!

Ketchup Marketing – Award-winning marketing experts obsessed with results

At Ketchup, we consider ourselves marketing specialists whose mission is to offer bespoke marketing solutions, from strategic planning to final execution, so that you can realise your business‘s ambitions. You’ll find our HQ in the vibrant heart of Nottingham.

Since we were founded, and until this very day, we have been helping our list of varied clients grow their marketing ROIs to the best of our ability. All of our past projects have brought our clients the marketing success they have deserved, and we are proud to have worked with people from all industries and walks of life. 

Our reputation is something we take very seriously and we are proud to say that it has gone from strength to strength. We are highly results-focused and use all of our creative and innovative marketing methods to achieve the best results for your company – whatever the sector you are in or your business aims. 

Every member of the Ketchup Marketing team is highly motivated in their role and is dedicated to transforming the marketing efforts of each and every customer. With a vast pedigree of experience and cutting-edge skills, our staff are here for you – whatever your background, sector or requirements.