ROI Calculation

ROI Fundamentals

Return on Investment (ROI) measures how much incremental value each marketing dollar generates. Decomposition provides the contribution data needed to calculate accurate marketing ROI.

Purpose: Calculate ROI for each channel and group to optimize budget allocation and demonstrate marketing effectiveness.

Basic ROI Formula

Standard Calculation:

ROI = (Incremental Contribution / Marketing Spend) - 1

Expressed as Percentage:

ROI% = ROI × 100

Return Multiple (Alternative Format):

Return Multiple = Incremental Contribution / Marketing Spend

Example:

• TV Contribution: $500,000

• TV Spend: $200,000

• ROI = ($500,000 / $200,000) - 1 = 1.5 or 150%

• Return Multiple = $500,000 / $200,000 = 2.5

Interpretation: For every $1 spent on TV, you generated $2.50 in sales (net return of $1.50 profit).

Data Requirements

From Decomposition

Incremental Contribution:

• Sum of channel contribution across all time periods

• From group decomposition or variable decomposition

• Use actual contribution values from charts

Example - Getting TV Contribution:

1. Run main decomposition

2. Or drill into Media group

3. Sum TV contribution column from Excel export

4. Result: $500,000 total contribution

From Your Source Data

Marketing Spend:

• Actual dollars spent on the channel

• Same time periods as decomposition

• Match currency and units

Example - Getting TV Spend:

1. From your marketing budget/actuals

2. Sum TV spend for same 12-month period

3. Result: $200,000 total spend

Step-by-Step ROI Calculation

Step 1: Export Decomposition Data

Get contribution values:

1. Navigate to Model Library

2. Click Export on your model

3. Open Excel file

4. Find "Group Decomposition" or "Variable Decomposition" sheet

Step 2: Sum Contribution by Channel

In Excel:

Sum the contribution column for each channel

Example from Variable Decomposition sheet:
TV_Spend column: sum all values = $500,000
Digital_Spend column: sum all values = $400,000
Radio_Spend column: sum all values = $200,000

Step 3: Get Total Spend by Channel

From your data:

Sum actual spend for same time periods

TV total spend: $200,000
Digital total spend: $150,000
Radio total spend: $100,000

Step 4: Calculate ROI

Apply formula:

TV ROI = ($500,000 / $200,000) - 1 = 1.5 = 150%
Digital ROI = ($400,000 / $150,000) - 1 = 1.67 = 167%
Radio ROI = ($200,000 / $100,000) - 1 = 1.0 = 100%

ROI Comparison Table

Create Summary:

Channel	Total Contribution	Total Spend	ROI	Return Multiple	Rank
Digital	$400,000	$150,000	167%	2.67x	1
TV	$500,000	$200,000	150%	2.50x	2
Radio	$200,000	$100,000	100%	2.00x	3
Print	$50,000	$50,000	0%	1.00x	4

Insights:

• Digital has highest ROI (167%)

• TV has highest absolute contribution ($500K)

• Print breaks even (0% ROI)

• All channels except Print are profitable

Group-Level ROI

Calculate for Contribution Groups:

Example - Media Group:

Media Group Includes: TV, Digital, Radio, Print

Total Media Contribution: $1,150,000
Total Media Spend: $500,000

Media ROI = ($1,150,000 / $500,000) - 1 = 130%

Use: Evaluate overall marketing effectiveness

Time Period ROI

Calculate by Period:

Monthly ROI

Example - January Performance:

January TV Contribution: $45,000
January TV Spend: $20,000
January ROI: 125%

February TV Contribution: $50,000
February TV Spend: $20,000
February ROI: 150%

Insight: ROI improving month-over-month

Campaign ROI

Isolate Specific Campaigns:

Black Friday Campaign (3 weeks):
Campaign weeks TV contribution: $150,000
Baseline (without campaign): $30,000
Incremental lift: $120,000

Campaign spend: $80,000

Campaign ROI = ($120,000 / $80,000) - 1 = 50%

Important: Subtract baseline to get true incremental impact

Interpreting ROI Results

ROI Benchmarks

E-Commerce / DTC:

• Search: 150-300%

• Social: 100-200%

• Display: 80-150%

• TV: 80-120%

CPG / Retail:

• TV: 80-150%

• Digital: 100-200%

• Trade Promotions: 50-100%

• Consumer Promotions: 100-200%

B2B / SaaS:

• Search: 200-400%

• Content: 150-250%

• Events: 100-200%

• Display: 80-150%

Note: Benchmarks vary by industry, competitive intensity, and business model

What's a "Good" ROI?

Context Matters:

Positive ROI (>0%):

• Breaking even or better

• Covering marketing costs

• Acceptable minimum

100% ROI:

• Doubling your money

• Strong performance

• Industry standard for many channels

200%+ ROI:

• Tripling your money

• Excellent performance

• Room to scale investment

Negative ROI (<0%):

• Losing money

• Unacceptable except for strategic reasons

• Requires immediate attention

Strategic vs. Tactical ROI

Brand Building (Lower Short-Term ROI):

• TV, Display, Sponsorships

• Long-term value creation

• ROI: 50-100% acceptable

Performance Marketing (Higher ROI Expected):

• Search, Retargeting, Affiliates

• Direct response

• ROI: 150-300% expected

Balance Both: Portfolio approach considering short and long-term value

Advanced ROI Calculations

Marginal ROI

Return on the last dollar spent:

Why It Matters:

• First dollars spent have highest ROI

• ROI declines as spend increases (diminishing returns)

• Marginal ROI guides optimization

Estimation:

Compare two spend levels:

At $100K spend: $200K contribution (100% ROI)
At $150K spend: $270K contribution (80% ROI)

Marginal contribution of extra $50K: $70K
Marginal ROI: ($70K / $50K) - 1 = 40%

Insight: Next $50K has lower ROI than average - approaching saturation

Lifetime Value ROI

For subscription or repeat purchase businesses:

Customer Acquisition Cost: $100
Immediate Revenue from Customer: $50
First Purchase ROI: -50% (looks bad)

But...
Lifetime Value: $500

True ROI = ($500 / $100) - 1 = 400%

Consideration: MMM typically shows short-term ROI, may undervalue brand building

Incremental vs. Total ROI

Always Use Incremental:

WRONG - Total ROI:
Total Sales during TV Campaign: $1M
TV Spend: $200K
ROI = 400% (INCORRECT - includes baseline sales)

CORRECT - Incremental ROI:
Incremental Sales from TV (from decomposition): $300K
TV Spend: $200K
ROI = 50% (CORRECT - only TV's contribution)

Using ROI for Decisions

Budget Reallocation

High ROI → Increase Investment:

Digital ROI: 200%
Action: Test increasing Digital budget by 20%
Monitor: Does ROI remain above 150%?

Low ROI → Decrease or Optimize:

Print ROI: 20%
Action: Cut Print budget by 50% or eliminate
Reallocate: Move budget to higher ROI channels

Spend Level Optimization

Find Optimal Spend:

Current: $100K spend at 150% ROI
Test: $120K spend

If ROI stays >130%: Continue increasing
If ROI drops <100%: Reduce back

Goal: Maximize total profit, not just ROI

Channel Mix Decisions

Optimize Portfolio:

Scenario A: All budget in highest ROI channel (Digital 200%)
Risk: Saturation, diminishing returns, lack of diversification

Scenario B: Balanced across channels
- Digital (200% ROI): 50% of budget
- TV (100% ROI): 30% of budget
- Radio (80% ROI): 20% of budget
Benefit: Diversification, sustainable long-term

Common ROI Mistakes

Mistake 1: Using Total Sales Instead of Incremental

❌ ROI = Total Sales / Spend
✓ ROI = Incremental Contribution from Decomposition / Spend

Mistake 2: Mismatched Time Periods

❌ Q1 contribution / Q2 spend
✓ Same time periods for both

Mistake 3: Ignoring Carryover Effects

Consider adstock: This month's spend may impact next month
Decomposition captures this in contributions

Mistake 4: Not Accounting for Adjustments

If using Min adjustment, calculate ROI on incremental only
Document adjustment in ROI reporting

Mistake 5: Comparing Short and Long-Term Channels

TV (brand building) vs. Search (direct response)
Different time horizons, different ROI expectations

ROI Reporting Template

Channel ROI Summary:

Channel: Digital Search

Performance Period: Jan - Dec 2024

Metrics:
- Total Contribution: $400,000
- Total Spend: $150,000
- ROI: 167%
- Return Multiple: 2.67x

Comparison:
- vs. Last Year: +15% (was 145%)
- vs. Industry Benchmark: Above average (150-300% range)
- Rank: #1 in portfolio

Trend:
Q1: 150% → Q2: 165% → Q3: 175% → Q4: 180%
Improving over time

Recommendation:
Increase investment by $50K
Expected additional contribution: $100K
Projected ROI: 150%+

Summary

Key Takeaways:

ROI Formula:

ROI = (Contribution / Spend) - 1

Data Sources:

• Contribution: From decomposition

• Spend: From your marketing data

• Time periods: Must match exactly

Use ROI To:

• Compare channel effectiveness

• Guide budget allocation

• Justify marketing spend

• Optimize mix

Remember:

• Use incremental contribution (from decomposition)

• Match time periods

• Consider diminishing returns

• Balance ROI with strategic goals

Next Steps:

• Calculate ROI for all channels

• Rank and compare

• Develop reallocation plan

• Monitor changes over time