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Marketing Strategy

How to Calculate ROI in Digital Marketing

by Darrell Evans . March 02, 2020
Prove that your digital marketing campaigns and efforts are yielding impactful results.

In today’s online world, consumers are now introduced to, engaged with, and make purchases from businesses online.

Digital marketing isn’t your company’s “magic” marketing bullet unless it is regularly monitored, measured, and constantly tweaked. One of the best ways to measure the effectiveness of these efforts is through calculating its return on investment, or ROI. After all, what is the point of investing in costly marketing endeavors if they don’t generate sales?

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Measuring Digital Marketing

The invention of computers and the World Wide Web has given marketers new frontiers to reaching customers online. With the majority of consumers accessing the web on their smartphones, tablets, and laptops, digital marketing has become a valuable and important part of every business’ marketing plan.

In traditional marketing, ROI was only measured by the increase of revenue and sales a particular marketing piece, campaign, or strategy generated. Companies didn’t bother creating a system to analyze the progress and results of their marketing efforts. If sales went up, companies would iterate their marketing efforts without any changes or improvements. Conversely, when sales dropped, marketing managers would stop what they were doing and try something else.

Today’s marketers can measure how effective a current campaign is doing in addition to the campaign’s return on investment. The return on investment for your digital marketing efforts, however can be easily calculated without the need for sophisticated tools. Below is the basic ROI calculation as well as some important things to consider when measuring it.

How to Calculate ROI in Digital Marketing?

Return on investment simply compares the profit that resulted from a digital marketing campaign to how much the campaign cost to create and deploy. Ideally, you want as high an ROI as possible.

The basic ROI calculation is:
ROI = (Net Profit/Total Cost)*100

The return on investment calculation, however, won’t mean much if you don’t have any objectives or goals, have inaccurate numbers and data in your calculations, measure the wrong key performance indicators (KPIs), or are uncertain what you’re measuring.

Before calculating a campaign’s ROI, consider the following:

1. Understand Your Objectives

You want to prove to management that your digital marketing strategies successfully bring in revenue for the organization. Marketers are drawn to the appeal of proving the ROI of their work, but what if ROI isn’t the only metric your business should use in assessing the success of your efforts? This is where it’s important to understand your unique marketing objectives before you deploy and measure your campaigns and strategies.

Not everything in your digital marketing campaign will have results that directly show ROI. For instance, lead generation and clicks can be counted, but they have no monetary value that would illustrate ROI. If you measure everything in terms of revenue, you’ll miss the true effectiveness of your marketing efforts.

2. Identify Key Performance Indicators

Your business is unique and different from even your competitors in your market and location, and your KPIs must reflect this. If you try to use the KPIs of other organizations, you’ll end up with data that isn’t useful to your own.

Below are common KPIs to consider:

1. Unique Monthly Visitors. This KPI lets you know how many people clicked through to your website in a month. For more specific data, this metric can be segmented by traffic sources, such as organic, paid, or social.

2. Cost Per Lead. This metric is automatically calculated in Google Adwords and it shows how much it costs to get each lead.

3. Cost Per Acquisition (CPA OR CAC). To learn how much you spend to acquire customers, not leads, cost per acquisition is the KPI you’ll want to look for. It is calculated by dividing your total marketing spend by the number of acquired customers.

4. Return on Ad Spend (ROAS). This KPI looks at the profit made through an ad and the total cost spent on creating the ad. It is calculated by (revenue/total ad spend) *100.

5. Average Order Value (AOV). E-commerce, B2B companies and businesses offering services will find this KPI useful. This metric lets you know the value of each customer’s purchase each time they purchase.

6. Customer Lifetime Value (LTV). How valuable are your customers? The customer lifetime value can answer this question. While this KPI can be valuable for any business, e-commerce businesses will especially find this number valuable.

7. Lead-to-Close Ratio. The lead-to-close ratio is calculated by dividing the number leads by the number of leads that were closed. This ratio can inform you of the quality of the leads your marketing team hands over to the sales team as well as how effective your sales team was at closing leads. This ratio can help you calculate your projected digital marketing ROI through this formula:

Projected ROI = [(LTV-COGS-CAC)/(COGS+CAC)]*100

Where customer acquisition cost (CAC)=LTCR or lead-to-close ratio*CPL or cost-per-lead.
COGS stands for “cost of goods sold.”

8. Branded Search Lift. This KPI looks at how many people searched specifically for your brand. This metric will increase over time as your brand becomes more established and recognizable. Branded search lift is a great metric to use when measuring the increase of awareness for your brand.

9. Average Position. The positioning of your website in search results can make a significant difference on how much traffic your website receives. This metric measures your search result page ranking for your targeted keywords. Google Analytics can calculate this number for organic search. The higher your ranking, the more clicks, revenue, and ROI to your website, which translate into higher revenue and ROI.

10. Non-Brand CTR. Did you get people to your website without directly marketing your brand? Non-brand click-through-rate will give you insights into how well your SEO strategies performed. Google Search Console can calculate this metric.

3. Ensure Your Data Collection Methods Are Clean

In order to measure your KPIs, your data collection system and methods must be able to collect data cleanly. If there are any hiccups or inconsistencies in how the data is entered, collected, transferred, or calculated you will end up with data and information that skews your KPI and ROI numbers. Inaccurate KPIs will not be useful in assessing how effective your digital marketing efforts were in finding, attracting, and converting online customers.

Before you collect data, be sure to identify the KPIs you want to track, assess, and get data on. These KPIs should be in alignment with your overall marketing strategy, goals, and objectives. It also helps to find and implement data collection software that fits your organization’s marketing budget and features the capabilities your business needs to measure its KPIs. This is important if both your marketing and sales teams are involved in the marketing efforts. Set up a uniform data collection system and set of procedures for your sales and marketing departments that’s centralized and accessible.

4. Gain an Understanding of How Those KPIs Fit Into the Bigger Picture

The goal of marketing is to increase sales, which are often represented by revenue and ROI. When you focus entirely on ROI, you only see a little bit of the bigger digital marketing picture. Your KPIs play important roles, but while many have no direct correlation to increased ROI, there is often a pattern between the two.

For example, if your KPIs include a heightened click-through rate and lower cost-per-customer, you may also notice an improvement in your marketing ROI over the same period. This shows how an influx of website visitors who come to your page through free organic search can play a part in increased sales and lower acquisition costs, improving your ROI. Your KPI numbers may not be useful by themselves, but when you see how they are interconnected and improve your ROI, they become powerful.

5. Draw Insights From KPIs to Measure ROI

How does the amount of website traffic, cost-per-lead, search page result rankings, and shares of your Facebook or Instagram posts translate into digital marketing ROI? These KPIs in and of themselves are good indicators of how well (or not) your digital marketing efforts are in attracting customers and generating conversions.

If your social media outreach generates interactions with leads or you post viral-quality content, you’ll likely generate more revenue and sales through heightened brand recognition and authority. You’ll likely see an increased ROI because of better website traffic and improved session duration numbers that are achieved through optimizing your website content.

Trust and authority due to greater online engagement and visibility achieved through KPIs will inevitably lead to increased sales and subscriptions. These in turn will result in greater revenue for your organization and a better ROI for your digital marketing efforts.

What Is a Good ROI for Digital Marketing?

Depending on what ROI you are measuring, it can be useful to look at what the industry benchmarks are for specific KPIs that are relevant for your business. If you advertise on Google Adwords, the average conversion rate is around 2.4 percent, with the top 25th percentile having a conversion rate of 5.3 percent and the top tenth percentile producing a conversion rate of 11.4 percent.

It is also important to note that your order value will be highest for direct and search traffic and email marketing. Social media usually yields the lowest order value. For email marketing conversion rates, tools like MailChimp publish reports that tell of appropriate ROI benchmarks according to company size, industry, unsubscribe rates, open rates, and click-through rates.

Besides looking at industry benchmarks, you can also look back on your company’s historical performance numbers and data. Pay attention to the ROI metrics you’ve used in the past and assess if they are still relevant. You can also look back on spikes and dips in your online marketing performance and try to diagnose what went well and what didn’t. Your business model will also help you determine which KPIs and ROI are good in assessing your marketing efforts. Below is a guide on what to consider for e-commerce, lead generation, and content businesses:

E-commerce:

  • KPI metrics: Website traffic, amount of social media engagement, newsletter subscribers, and cart items
  • ROI metrics: Sales revenue, transaction volume, average conversion rate, revenue, transactions, days to transaction, sessions to transaction, average order price, and average sales price

Lead Generation:

  • Leading metrics: Amount of traffic to website, form conversions and completions, webinar and event attendance, and number of demos confirmed.
  • ROI metrics: Lead volume, cost per lead, lead conversion rate, lead quality, and close rate

Content:

  • Leading metrics: Traffic to website, click-through rates, average session duration, average pages per session, and community and social media engagement
  • ROI metrics: Subscriptions to email lists, online newsletters, downloads, and subscription length, and article shares

Calculating the ROI in digital marketing is dependent on factors including audience, company size, business goals and objectives, and industry. Sometimes ROI alone isn’t the best number to use to measure the success of your marketing efforts. Instead it may be helpful if you analyzed your KPIs and how they fit into the overall picture of improving digital marketing ROI.

Schedule a free strategy session with one of our digital marketing experts.

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