In every marketing campaign, knowing the Return on Investment or ROI allows entrepreneurs to make decisions that determine their business success. Therefore, it’s fair to say learning how to measure your marketing ROI helps you assess if your business is on the positive side of the equation.
The concept behind ROI is not so simple. However, it is essential for any entrepreneur to learn how to calculate ROI. The last thing you’d want is to spend thousands blindly on marketing your product or service without any certainty if what you get in return compensates for what you spent.
Why is Calculating ROI Important?
The goal of calculating ROI is to check if all the spending goes back in through revenue. Hence, even if it may be a nuisance for some entrepreneurs to deal with numbers, they strive to keep a tab of their ROI because it helps realize their marketing goals. Regardless of business size, entrepreneurs spend thousands and even millions of dollars on promoting one product. This may seem unreasonable, but good entrepreneurs don’t care as long as they get high returns.
While a good ROI helps a business stay afloat, measuring it may not be so simple. This article will help you identify the factors in ROI and ways to measure it.
What is a Good ROI for Digital Marketing?
According to Neilsen, a good ROI for digital marketing is $1.09. This means that for every $1 spent, the company generates $2.09. Capital that’s less than $1 will then give the company a profit of $1.09.
The determining factors for good ROI vary in certain standards. The type of industry is one. You can’t expect to stick to the $1.09 ROI if you’re in real estate or investing.
Before you can figure out what your business’s ROI is, you need to know what information you need. In any business, it’s integral to keep financial records and keep them organized so it’s easier to go back to. Record-keeping can be done manually using a journal ledger or online software services like QuickBooks. The aim is to keep a comprehensive record of every dollar that goes in and out of your pocket. Some common factors that affect a business’s ROI are:
What you spend at the beginning of the day may not return to you on the same day. It may be a month, or a year after, that you get the return of what you invested today. Thus, businesses use a marketing calendar to cover their yearly marketing activities. This helps them track and reevaluate their marketing campaigns. You should use one for your business, too.
- Cost of Producing the Campaign Material
To calculate ROI, you need to determine how much money will it take to produce all the campaign materials for your project. How much did you pay for the graphic designer to develop your landing page? How much did it cost to hire a copywriter? You need to know the exact amount you’ve spent.
Once you have your marketing materials, for example, a landing page, how would you promote it? Will you promote it through Pay-per-click (PPC) or social media advertising, like Facebook ads? All of these constitutes to the financial resources you need to expend, so make sure you keep proper records.
Hopefully, you’ve done your part in recording all the necessary figures in your ledger. After all, the ROI is a number that needs to be continually updated.
The Figures Needed and the Formula
- Number of Leads
Whether you do inbound or outbound marketing, knowing the number of leads is essential. How many signups for the free trial did you get? How many prospects gave you their email address? You need to learn how many leads you get each day, week, or month. To track, you can make use of a lead management or tracking software like Zoho.
- Number of Converted Leads
Out of every 100 leads, how many are converted to clients? How many made the purchase? Knowing this number is essential so you can calculate the lead-conversion ratio.
- Product Average Sales
Another thing is the average cost of your product. If you occasionally alter the price of your products, it’s better to get the average sales. Average sales is the amount each customer spends on buying your product.
Identify the cost of creating and promoting your product. This includes wages or payment for services, ad spend, and other things for promoting the product.
When you have all this information, you can calculate the ROI through the following steps:
- Multiply the number of leads by the lead-to-customer rate and your product’s average sales price
- Then, subtract the amount you spent for ads and other promotional activities
- Divide this number again by the cost or ad spend
- Multiply by 100 and the final number will be your ROI.
Types of Marketing Campaigns and How to Compute
Often, businesses try different digital marketing strategies to test which one delivers favorable results. In general, marketing is an opportunity to test which campaigns are effective and which aren’t. If one campaign doesn’t give the intended results, it is either modified or taken down. Here, you’ll learn what frequent campaigns businesses implement and samples on how to compute the ROI.
- Written Content Marketing
Articles are a great form of content marketing. Any written content is useful in engaging the readers and keeping them up-to-date with the changes in your business or products. More importantly, written content can be used to condition your leads towards a buying move in the future, so it increases your ROI.
Computing ROI for Written Content Marketing
For example, you hire a project-based writer from a freelancing platform to write an article related to your online course about digital marketing. You paid $500 for the job. Now, this article will direct readers to a landing page where they buy the online course. Using a tracking URL, you can see how many visitors get to the landing page through a click from the article.
If the article gets 100 leads, with 10 people signing up for the online course and $100 average sales, ROI would be $100. Here’s the computation:
If you follow the same steps as mentioned above, then:
[((100x 0.1 x $100) – $500) ÷ $500] x 100 = $100 (ROI)
In conclusion, in every $500 you spend on content, you generate $600 in return, which gives you a profit of $100.
- Email Marketing
Believe it or not, email has been a major source of revenue for many businesses. As a matter of fact, with a good campaign, some businesses can generate a massive email conversion rate of 3800%. It means in every $1 spent, businesses get $38 in return. It might seem impossible at first, but many businesses have exceeded this ROI rate for years.
Email marketing is cost-effective. Most times, this campaign doesn’t require graphics or high-quality images that are considered expenditure. Email marketers exploit words to get conversions and increase ROI.
Computing ROI for Email Marketing
You want to use email marketing to promote your online course on digital marketing. For example, an online learning platform is offering a weekly e-newsletter to those who sign up on their website. You pay them $100 to include a link to your course in their weekly e-newsletter that links to a purchasing page.
Again, using a tracking URL, you see it droves 20 visitors to the purchasing page. Of these 20 visitors, 2 enrolled with an average of $100 sales. Here is how to compute ROI.
[((20x 0.1 x $100) – $100) ÷ $100] x 100 = $100
So basically, in $100 you spent for email marketing, you get $200 in revenue, or $100 net profit.
- Video Marketing
Video marketing is ideal if you’re selling a product that requires step-by-step instructions for customers to follow. Take, for example, home security systems that need installation instructions. Instead of writing an article for the instructions, using video to educate your potential buyers to eliminate one of the pain points of your product, which is installing it. This makes the decision to buy your product easier.
Computing ROI for Video Marketing
For example, you decided to outsource and spend $1000 in creating your video marketing material. After uploading, it resulted in 10 purchases out of 100 leads, with average sales of $500. The computation would look like this.
[((100x 0.1 x $500) – $1000) ÷ $1000] x 100 = $400
In short, you get $400 net profit in spending $1000 for video marketing.
Calculating ROI might look easy with the examples, but these numbers are just representation. In business, you encounter more numbers to deal with.
- Pay-per-click Campaigns
Pay-per-click is exactly what its name implies. You only pay for every click on your ad. If you launch a PPC ad, you need to monitor and manage your campaign constantly. You need to modify your campaign as you go along and get to know your audience better. If you use Google ads, you can use the Google Ads Editor to manage and monitor your campaign.
Company XYZ sells mattresses. To get more customers, they use PPC ad, with which they pay $500. Out of 6 clicks, 1 end up buying a mattress that costs $600.
[((6x 0.167 x $600) – $500) ÷ $500] x 100 = $20.24
This return may not be viable, so the business decided to modify their first campaign. They made the copy more compelling and included more details about the product. For this, they spent $300. As a result, 10 new clicks and 3 purchase the product with an average sale of $700.
[((10x 0.3 x $700) – $300) ÷ $300] x 100 = $600
In the end, Company XYZ nets $600 more than the first campaign.
Usually, businesses use sponsorship when there is no time or enough materials to produce content. Businesses reach out to influencers (people who have a large following in social media) and offer to promote their brand by creating relevant content, usually in exchange for monetary value or giveaways.
Computing ROI for Sponsorship
For example, a famous beauty brand launches a new product—let’s say, a face mask. The business owner connects to some beauty influencers for collaboration in creating content, like a YouTube video, to promote the face mask and add the tracking URL to the description. If the company pays $300 and gets 15 people out of 50 visitors to purchase the product that costs $60 each, what would be the ROI?
[((50x 0.3 x $70) – $300) ÷ $300] x 100 = $250
The company gains $550, with $250 net profit from spending $300 for sponsorship.
Learning how to calculate your marketing ROI enables you to assess if your business is in the right direction and how profitable it is becoming. This is essential because ROI is a long-term goal for every business. Monitoring your ROI gives you insights whether the different strategies you have in place are delivering the results you desire for your business.