How NOT to calculate Marketing ROI

Following is an excerpt from an email I got from one of my clients:

……there might be a positive ROI on actual ad spend, there is actually a negative ROI overall (including cost of shipping, products, packaging, staff etc)”

This discussion (or better day disagreement) was around how to correctly calculate the marketing ROI.

And this is not the first time, I have faced such objection.

There are still lot of marketers and business owners out there, who calculate marketing ROI incorrectly.

Following is the most basic formula to calculate ROI:

ROI = (return from investment – cost of investment) / cost of investment

Almost everyone agree with this formula and agree that it is correct.

The disagreement popup when it’s the time to decide, what should be included as ‘cost of investment’.

For marketing ROI, the cost of marketing, is the cost of investment.

Marketing cost should include both ad spend and marketing fees.

If you do not take marketing fees into account then what you are calculating is ‘return on ad spend’ (ROAS) and not ROI.

Now the question comes, why some clients raise such objection in the first place?

There could be a situation where your client is not overall profitable as a business, despite of positive marketing ROI.

This could be due to some operational inefficiencies like bureaucracy, company culture, product pricing, merchandising etc.

As a marketer you have no control over client’s operational inefficiencies.

You have no control over the operational and strategic decisions that your client takes in his office regarding how their business should run and grow.

You have no control over client’s staff salaries, product pricing, shipping, packaging , merchandising, operational cost and the various taxes, custom, excise duty etc that they have to pay.

Your role is limited to advertising their products/services and so should be your business liability.

Your job as a marketer is to make sure that you recover your entire marketing cost, including your own fees and make money on top of that.

You are not responsible for generating staff salaries or recovering entire product manufacturing and distribution cost from your marketing efforts.

We never calculate marketing ROI like that.

Long story short, as a marketer you are not responsible for the overall profitability of the client’s business.

That level of responsibility lies on the shoulder of key stakeholders (business owners, business partners, top level executives) within the client’s company.

So next time, when you face such objection from one of your clients, educate him/her about your limitations as a marketer.

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Himanshu Sharma

Digital Marketing Consultant and Founder of Optimizesmart.com

Himanshu helps business owners and marketing professionals in generating more sales and ROI by fixing their website tracking issues, helping them understand their true customers purchase journey and helping them determine the most effective marketing channels for investment.

He has over 12 years experience in digital analytics and digital marketing.

He was nominated for the Digital Analytics Association's Awards for Excellence.

The Digital Analytics Association is a world renowned not-for-profit association which helps organisations overcome the challenges of data acquisition and application.

He is the author of four best-selling books on analytics and conversion optimization:

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