Although marketing is not an exact science, the data and analytics gained from accurately tracking marketing—such as paid media campaigns—can greatly help your future marketing efforts become more accurate. However, when it comes to digital advertising and paid media, one of the biggest questions a company can have is how to best measure their ad campaign’s effectiveness.
Using methods such as ROI, ROMI, and ROAS can lift the veil of mystery surrounding the success of your ad campaigns, but which method is right for your business and your overall marketing campaign? Let’s discuss.
Return on Investment, or ROI
The easiest way to calculate the return on investment (ROI) of a marketing campaign is to integrate it into your overall business line calculation. To do this, take the sales from that business or product line, subtract the marketing costs, and then divide by the marketing cost.
(Sales Growth - Marketing Cost) / Marketing Cost = ROI
For example, if you sold $1,000 of your product and the marketing campaign cost $100, then the simple ROI is 900 percent. Great job!
The problem with simple ROI is that it assumes 100 percent of sales can be directly attributed to a single marketing campaign, which we know is never the case. To get a clearer picture of your ad campaign ROI, it’s best to use monthly comparisons of the same business line before your campaign launch.
Using data from the 12 months before the launch of your campaign, you can calculate your sales growth trend. If your sales are seeing organic growth of 5 percent, then you can strip this 5 percent from your ROI calculation for your campaign. Here’s what this will look like:
(Sales Growth - Average Organic Sales Growth - Marketing Cost) / Marketing Cost = ROI
($15,000 [sales during this campaign] - $500 [organic sales growth] - $10,000 [campaign cost]) / $10,000 = 45%
One challenge of using ROI to measure your ad campaign’s effectiveness: Many marketing campaigns are designed around more than just generating sales. Other metrics can include things like new marketing qualified leads, new sales qualified leads, or even the number of meetings booked. These types of metrics can’t be accurately measured in dollars, making ROI less effective for measuring your campaign’s success.
Return on Marketing Investment, or ROMI
Another way to measure the effectiveness of your ad campaign is to calculate your return on marketing investment (ROMI). ROMI is an indication of return on investment in marketing. As a percentage ratio, ROMI demonstrates profitability or waste of a concrete sum of invested money.
ROMI is calculated with the following formula:
ROMI = ([income from marketing – cost of goods – marketing expenditures] / marketing expenditures) x 100.
If ROMI is less than 100 percent, then marketing investments were wasteful, and if it’s more than 100 percent, they were profitable.
Let’s look at an example of an instance when we want to understand the effectiveness of a retargeting campaign. Monthly spending was $2,000, and the campaign generated sales of $25,000. Taking into account that the cost of goods sold totals $20,000, the effectiveness of the advertising campaign is calculated with the formula:
ROMI = ([25,000 – 20,000 – 2,000] / 2,000) x 100 = 150%
In this example, the ROMI equals 150 percent for the retargeting campaign, and the campaign was profitable. In other words, this campaign generated $1.50 of income for every dollar spent on marketing.
As you can see, ROMI is very effective at helping you to understand how effective each of your marketing dollars were at bringing in a return. ROMI can also be used without considering your cost of goods, which is useful if your advertising platform doesn’t know your cost of goods.
Return on Advertising Spend, or ROAS
Return on advertising spend (ROAS) is another variation of ROI that can be used to measure the effectiveness of your advertising campaign. ROAS is very similar to the ROMI formula, however, it doesn’t deduct the cost of goods or advertising costs.
ROAS is about more than how much money you get back from your ad spend; ROAS can be a pulse check on your overall business. Other metrics like click-through rate, impressions, and cost per conversion are valuable, but they don’t show how much revenue these actions bring in. ROAS has the potential to show that, while some campaigns may rank poorly for traffic and conversion metrics, they could actually be the most profitable.
To calculate ROAS, simply plug your numbers into the following formula:
Revenue ÷ Advertising Costs = ROAS
For this example, we’ll say you’ve spent $1,000 in ads and made $3,000 in revenue so far this month. Your formula would look like this:
$3,000 ÷ $1,000 = 3
This means that your campaign is generating $3 in revenue for every $1 spent. Although every business is different, in general, $3 in revenue for every $1 spent in advertising is considered good for ROAS.
To determine what the ROAS should be for your business, you’ll need to have an understanding of your profit margin. The larger your profit margin is, the lower your ROAS goal will have to be and vice versa.
How Will You Measure Your Ad Campaign Effectiveness?
There are dozens of different ways to measure the effectiveness of your advertising campaign. The trick to selecting which formulas and calculations are right for your business depends on a number of factors, including your overall marketing goals, your key performance indicators (KPIs), and the advertising channels you’re using.
Having a trusted partner manage your advertising campaign can also help because they’ll be able to figure out which metrics are important to measure for your business goals.