23 Apr Measuring Return-On-Investment (ROI)
It’s quite possible to write an entire thesis on all the intricacies and models that accompany ROI calculations but in its essence, it is rather simple – what you are earning versus what you are spending on marketing.
Some platforms such as Google ads lets you easily look up your conversion rate and calculate your ROI, but it is quite possible for anybody who can add or subtract to this math. Because there are so many variables at stake when it comes to digital marketing, it’s not always possible to get an exact number, but it’s easy to get an idea of whether a campaign or a website is successful in generating leads or converting leads into sales.
Cost per lead is calculated by dividing the marketing costs by the number of leads generated. Cost per acquisition is dividing the marketing costs by the number of sales generated. This is your cost per sale, in other words, the money you made as a direct result of digital marketing. Marketing costs include any cost incurred to execute a campaign; such as pay-per-click advertising, content production costs, media spend and display click ads.
These calculations can be done per channel, per website or per campaign. For example, to measure the amount of revenue your content generates on a certain channel (like Facebook or Google), you divide the channel costs by the number of leads generated over a certain period of time. By comparing the ROI of the different channels, it will indicate which channels are lucrative and which need adjustment to yield a higher conversion rate.
Now you might wonder, what is a good marketing ROI? It can either be calculated by ratio or percentage. So, revenue to cost ratio would represent how much money is generated for every rand / dollar spent in marketing. For example, five rand / dollars in sales for every one rand / dollar spent in marketing yields a 5:1 ratio of revenue to cost. A 5:1 ratio would be the middle of the bell curve. The higher the ratio, the more successful the campaign. A 2:1 revenue to marketing cost ratio probably won’t be profitable for many businesses as the cost to acquire the item should also be taken into account. Of course, the target ratio will vary depending on the industry and the cost structure. But applying a ratio is a simple way to see whether a campaign is working or not.
When comparing ROI on different channels or campaigns and finding some of them lacking in performance, it’s time to start troubleshooting to find out why. Low conversion rates could be due to a number of factors, some of which include:
- Poor website design
- Intrusive popups
- Unappealing offers
- Sloppy copy
- Ineffective call to action
- Targeting the wrong market
ROI can be measured and compared over any period of time, although year-over-year calculation, where a statistic for one period is compared to the same period the previous year, is considered most effective because it removes the effects of seasonal trends and it discerns long-term trends.
Hopefully this has helped you realize you don’t need a PhD in statistics to understand the basics of measuring ROI. It is absolutely invaluable in any digital marketing strategy to determine whether it is successful and making a profit instead of draining the bank!