How Do You Calculate ROI?

How do you calculate ROI (return on investment) for social media marketing?

Start by understanding the process, and knowing your goals

How to Calculate ROI

How Should You Calculate ROI?

Marketing is increasingly metrics-driven. This has been a terrific evolution for our profession because it enables us to sit at the C-suite table with equal legitimacy and credibility, not to mention the fact that we operate far more efficiently than before. Enterprise executives love anything that demonstrates achievement in concrete terms. But the discussion of which metrics to use, how to define them and when to use them is far from finished.

Marketing return on investment (marketing ROI), otherwise known as return on marketing investment (ROMI), seems like a straightforward concept that borrows from our ethren in finance. But if you peel this onion you’ll uncover a raft of questions that marketers frequently struggle with. For example:

We’re not going to play Solomon and make those choices for you, but we do want you to consider what goes into those numbers and how you should represent them to your peers in the C-suite. Sometimes you will be ordered by non-marketers to assemble those numbers in a particular way, and your options will be limited or nonexistent. In other companies, no one will have a clue. But whatever you do, transparency is your best ally. Spend plenty of time explaining your underlying assumptions and soliciting feedback.

Our own working definition is this: Take the revenue attributable to marketing efforts and divide it by marketing spend, which includes the costs associated with advertising and effort. We obviously want positive results greater than 1.

Another distinction to keep in mind: The investment portion of the calculation is not investment as we understand it in other business functions (plants, inventories, etc.).Unless marketing is buying some kind of durable infrastructure, everything is expensed. But here’s what is most important: Marketing expenditures should be understood as risk. For some people, this may be a distinction without a difference. In reality this implies that past experiences are more important for marketing decisions than it is for other functions. As an aside: The nature of risk and managing it appropriately are topics that are not well-understood by most people. This can make the discussion even more difficult.

In March, 2012 the Columbia Business School Center on Global Brand Leadership and the New York American Marketing Association undertook a study of 243 marketing executives to understand if and how they use ROI measures for budgeting. The study found that 57% do not use ROI in their budgeting process. Instead, 68% base their decisions on historical spending and 28% “go with their gut”.7% don’t use anything (except, perhaps, avado).

We are not surprised by these numbers. But there’s no one to blame. Marketing measurement science (for lack of a better term) is still in its infancy, even though we speak frequently about being “metrics-driven” and the evolution of our thinking over the last decade or two. There are lots of good ideas out there, but our profession has a long way to go before we reach even a modicum of standardization. The chaos notwithstanding, you still need to emace ROI calculations to show your bosses and peers that you are taking seriously the need to demonstrate marketing’s value to the enterprise.

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