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Anyone who is responsible for allocating and spending money to generate revenue should have a simple way to know if their activity is generating business. This is why return on investment (ROI) is an essential metric for any business.Return on investment is a mathematical formula used by investors to evaluate their investments and judge how well a particular investment has performed in comparison to others.
A common way of calculating your ROI formula is to divide your net profits by the total cost of the investment. The easiest way to understand these numbers is by establishing a revenue to marketing cost ratio. This ratio represents how much money is made for every dollar spent on marketing.
For example, five dollars in sales for every one dollar spent on marketing produces a 5:1 ratio of revenue to cost. 5:1 is a strong ratio for most businesses, while achieving 10:1 is considered outstanding. However, your target ratio depends on your cost structure and will vary depending on your industry. 5:1 is a great benchmark to aim for. Anything above can be considered a long-term goal.
When calculating your ratio, include any incremental cost incurred to execute a digital marketing campaign. This includes:
- Pay-per-click spend
- Display ad clicks
- Media spend
- Content production costs
- Outside marketing and advertising agency fees