The many definitions of ROI remind us of the importance of attention to details when calculating a good marketing investment.
A simple Google search for what ROI really means pulls up well over 10 different definitions on the first page alone.
A traditional investment is thought of as something simple like stocks or real estate. You invest $10,000, or $50,000, and overtime it grows at a rate of 6 to 12% per year. Roughly.
So let’s just say for simplicity sake, one year you invest $50,000 into the stock market and your investments grow at a rate of 8% that year. Yes, you end up with an extra $4000 in your pocket. And to make it even simpler we’re not taking into account any brokerage fees or broker commissions. Think, a Schwab Brokerage account that you manage on your own
$50,000 x 8% = $4,000
Your ROI = 8%
When it comes to marketing however, it’s not so simple. There are many other factors that come in to play such as COGS (direct variable expense), ad spend (indirect variable expense), labor associated with creating the product itself (direct variable expense, fractioned out), refunds/returns, and the investment towards the marketing partner who’s managing your marketing if that’s the case.
As you can see, a lot more goes into calculating what an actual return on investment is.
Herein lies the issue when you working with a typical marketing agency.
Their formula for ROI looks something like this:
ROI = (Revenue - payment to agency - ad spend) / (Payment to agency + Ad spend)
However, we can clearly see that the vast majority of the variables above are not taken into account. What this causes is an inflated ROI for the agency, and an inaccurate picture of how well your investment is actually doing.
At the bare minimum your marketing partner needs to take into account your cost of goods. And that best they will take into account COGS, refunds and returns, and your fractioned direct labor costs. Taking into account refunds and returns along side fraction and direct labor cost requires a little bit of extra effort. But if you’re willing to do it you will get the truest picture of your ROI with that marketing investment.
The basic formula should look something like this:
ROI = ((Revenue - Direct Variable Costs) - Indirect Variable Costs) / (Direct Variable Costs + Indirect Variable Costs)
There are certain services like brand strategy + kits, social media marketing, and content creation that make it a little bit more difficult to calculate a true ROI. The reason this is is because strategy, brand and content are indirect value adds to the business. Meaning there is not a direct action taken as a result of these things. They are elements of the business that compound over time, and create raving fans.
Confused? Angry? We get it. As a marketing partner to many e-commerce brands. We see this issue more than anything else. And unclear definition of a return on investment leads to many things, none of them good. The worst of all of them being the clients bottom line not growing. Because as a marketing partner that’s the only reason we exist. To bring a return to your investment
Is your marketing partner calculating ROI correctly?
P.S. Do you want one of our MavenXperts to take a look at the current state of your marketing and see what kind of ROI you might be missing out on?
Let’s get to know one another, schedule your FREE (Normally $150) 30 minute consultation here.