Marketing Online – What Was That ROI Formula Again?

by on January 26, 2012

You know ROI is a measure of your company’s success, but do you know how to go about measuring ROI? Questions plague you at night, “How do I get the most ROI? Shouldn’t I already be seeing returns? Maybe I should stop this approach and move to a new one…”

ROI Formula

Dr. Peter Drucker, Medal of Freedom winner, once said, “What gets measured gets managed.” What a powerful statement! –And one that you need to keep in mind when you delve into marketing your business.

Formulas vs. Fantasies

You can always pick a metric to track and call it “measuring ROI”. When talking about Internet marketing, metrics are plentiful: visits, click through rate (CTR), click to conversion ratios, number of backlinks, goals funneled, and traffic generated. Yet, without choosing the right metrics, it’s all just numbers – not, as you might think, a true measurement of your returns.

Believe it or not, there is a real formula for measuring ROI: (Gains – Cost) / Cost = % ROI

However, again, you have to measure quantifiable numbers to be able to use this formula and get correct measurements, rather than numbers that fell down the rabbit hole.

Setting and Managing a Sensible Marketing Budget

Crunching Numbers

You have your marketing budget. If you overspend on marketing and place a limit on other areas of growth within your company, you could end up irreparably “in the red.”  On the other hand, under-spending could be equally detrimental.

This is when you need to have an internet marketing professional on hand – someone who’s committed to partnering with you and cheering for your success.   However, you should set your marketing budget by following a few suggested guidelines.

Crunching the Numbers

  1. Calculate what percentage of your profits you can reasonably afford to spend. There’s a formula for this as well: Profits x Percentage Allotted = Marketing Budget.
  2. Define a minimum amount you are willing to pay, even when revenue is tight – there’s no formula; this is where the passion and commitment play a very important role. You set an amount and stick to it.
  3. If profits increase or decrease, re-calculate your marketing budget based on that same percentage and increase/decrease it accordingly (after a certain quarter not in the middle of one).

Here are some basic figures (for example purposes only). Let’s suppose you are willing to spend 25% of your profits on marketing, and your current profits for a certain website you own are $12K per month.

Formula: $12,000 X 25% = $3,000 per month.

Now, if your marketing is successful and profits increase, you can re-use your formula to calculate a reasonable budget.  Be willing to increase your marketing budget if your campaigns are going strong and increasing your profits.

Note: If you have a fluctuation in revenue, it doesn’t necessarily mean you’re overspending. It could mean that you’re not spending smart. Before reducing your marketing budget, look at your ROI for each campaign, or, at the very least, ask your Internet marketing firm how the portions of your overall marketing budget can be rebalanced for better returns.

Setting Up Your Marketing Campaign for Easy(er) ROI Calculation

Focus

Every marketing campaign will have its own methods of measuring. The answers to certain key questions will give you a very detailed and quantifiable way to gauge your return on investment:

What are my business objectives?

Your business objective can be one of many things, but make sure its focus is specific. For example, “building my business”, although an objective of any serious business individual, is too generic. “Sell more products” on the other hand, is a more specific focus while “Sell more of this product” is even more focused.

How will I reach my business objectives?

This is important – because the answer directly ties into the cost for your formula, as well as the KPIs you’ll measure. Again, you must be specific; generic inference to activities just won’t do. For example, “I’m going to use social media to achieve this” can’t be correctly measured, while “I’m going to post a Twitter exclusive coupon campaign, 4 times a day for a quarter, to increase sales” is very specific.

Note: When doing campaigns such as those in the example, be careful to walk the fine line between marketing and spam. If you’re tweeting the coupon 4 times a day, make sure you spread them out through the day instead of all at once.

What key performance indicators (KPIs) will I track?

KPIs are metrics that show you if you’re meeting your business objectives. Choosing the correct KPIs is important to correctly measuring ROI. Other metrics can be used, but they’re just numbers. KPIs are the magic metrics – the ones that say, “YES! You’re succeeding!” or, “We’re sorry. Your Internet marketing goals are not available for comment at this time.”

No KPI is Perfect

What metrics will help you figure out if a certain marketing campaign is working? Using the above example of business objectives, you can effectively track the Twitter coupon use to define how well the campaign did. Anyone that buys using that coupon is a direct result of the campaign. Therefore, in this case, your top metric – i.e. KPI – would be #of coupons used.

How much will this campaign cost me?

The cost of your campaign is, of course, directly decided by what you’ve chosen to do to meet your business objectives. A pay per click (PPC) campaign, for example, could be more expensive than a Twitter campaign. What you spend goes directly into your ROI formula. For example, if your Twitter campaign costs $1000, this goes into your ROI formula as (Gains – $1000)/$1000 = ROI.

What are my baselines?

Recording your baselines, or benchmarks, helps you actively see the returns. Your benchmarks will change, depending on your objectives, how you choose to reach these objectives, and the KPIs. If your campaign will run for a quarter, your benchmarks should span the entire previous quarter before the planned start date of your new campaign.

Measuring for ROI

Now, you have a good campaign start, and a good start to measuring the campaign’s return on investment. However, you have to be careful with calculating the Gains part of the formula. For example, you can’t make a blanket statement that your Twitter coupon campaign provided 50% ROI based on coupon sales alone.

Good Start

If you’ve set your sales or follow up pages with a Twitter link, there’s a strong possibility that you have followers that have already been customers. If you treated them with respect, they’re probably return customers. In other words, you can’t guarantee those followers aren’t among the ones using the coupon.

In this case, you’d have to narrow down to new accounts created that used the Twitter coupon.

Crunching the numbers

(for example purposes only)

At the end of your four month Twitter coupon campaign, 1,000 people used the Twitter coupon. Excellent. Those 1,000 people translated into $15,000 in gross sales. Even better. However $5,000 of those sales came from established accounts. Your actual, definable gains, then, would be $10,000.

This goes into your ROI formula as ($10000 – $1000)/$1000 = 90% gain in new sales (wouldn’t that be a great statistic to look at on your balance sheet?).

When you’re crunching numbers, you may have to do a little bit more than (Gain-Cost)/Cost = ROI to get the real answers. However, remember that you’re not supposed to be looking for numbers that make you feel good. You’re looking for numbers that tell you whether you’re spending your marketing budget wisely.

Managing Your Marketing Campaigns – When Your ROI Sucks

In the midst of all this monitoring, measuring and marking down numbers, take the time to also mark how low your ROI can be before you’re no longer willing to support a marketing campaign the way it is. For example, are you willing to push a campaign that only has 10% returns? How about 6% or 4%?

Once you hit that number, it’s time to assess what to do with the campaign. A total failure, for instance, might point to the wrong venue (i.e. Twitter, when your target market is on Facebook). A low, but visible ROI, however, is a strong candidate for A/B testing.

Dumping money down the drain on useless advertising, marketing or promotional efforts seems to be an obvious pitfall to avoid – but it’s unfortunately one that all too many fall prey to.  A/B testing is an excellent way to ensure you’re pointing your marketing dollars precisely in the right direction.  A/B Testing methodology on multiple ads, different venues, preferred landing pages, designs, content and other variables (on an isolated basis) also allows you to maximize ROI and put your budget where it belongs.

The Road to Riches

The road to riches is seldom paved with gold. In reality, it’s usually paved with a lot of hard work, sweat, mistakes and (eventually) achievements. It’s important to understand, then, that the above is just a guideline on building strong ROI with every marketing investment you undertake.

When it comes to the ROI of Internet marketing, you also have to be extremely careful with the metrics you choose, and whether those metrics pull in other sources of income. Online marketing revenue has a tendency to blend together.

Having said all that, marketing an online presence is a vital part of your business, even if you run a brick and mortar company. Much like growing a plant from seed to blossom, TLC and careful investments can turn a small business into a successful company. Of course you can contact us, if you have questions.



{ 2 comments… read them below or add one }

Dave Ventura February 8, 2012 at 11:14 pm

As being mentioned above ROI is the type of measurement in your business success. This is also the most crucial part in business as you must done it in a careful manner. Glad to find this post as it teaches step by step process on how to calculate it its either on offline or online based. It gives me a lot of information. Thanks for sharing!

Reply

mike February 4, 2012 at 5:57 pm

Nice take on ROI…. Marketing ROI is pretty much just spin, whether it’s traditional or social media marketing… There are always variables, a direct and indirect response to most business decisions. We will typically put more weight in one or the other when making the decision. There is also long term and short term goals involving ROI that the business owner should take into account… Some decisions based on a spring and some on a marathon, the ROI in each is and should be weighed differently…

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