Marketing Online – What Was That ROI Formula Again?

You know the Return on Investment (ROI) formula is a measure of your company’s marketing success, but do you know how to go about measuring ROI? Especially in today’s multi-site, multi-platform, multi-channel digital everything era, it can be difficult to monitor, measure, track, and direct the ROI of digital marketing.

Questions plague you at night, “How do I get the most ROI for my Internet marketing strategies? Shouldn’t I already be seeing returns? How ineffective was that last marketing campaign? Maybe I should stop this approach and move to a new one…”

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.

The ROI Formula

You can always pick a metric to track and call it “measuring ROI”. The metrics available are numerous: visits, click-through rate (CTR), click-to-conversion ratios, number of backlinks, goals funneled, and traffic generated. But, if you don’t choose the right metrics, you’ll be left with just numbers that won’t give you a true measure of your returns.

Measuring ROI requires using a real formula: (Capital Gains – Cost of Investment) / Cost = ROI. However, you need to measure quantifiable numbers to use this formula and get accurate results, rather than numbers that are just meaningless figures.

Setting And Managing A Sensible Marketing Budget

Correctly measuring your marketing ROI is crucial to the effective management of your marketing spending. Not only will you be able to defend your spending to stakeholders, but you’ll also be able to understand whether that pilot influencer marketing program was a flop, or if buying those email addresses for your cold outreach email list was effective.

If you overspend on marketing services 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.

If you have a marketing service budget, check below to see how on track you are. If you don’t have a marketing budget yet and are trying to figure out costs, you can 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 passion and commitment play a very important role. 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’re 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

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.

Build my business [very generic] => Sell more products [generic] => Sell more shoes [specific] => Sell more sandals [very specific]

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 throughout the day instead of all at once.

What Key Performance Indicators (KPIs) Will I Track?

KPIs (Key Performance Indicators) are metrics that businesses use to measure their performance in achieving specific goals or objectives. 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.”

What metrics will help you figure out if a certain marketing campaign is working or if you have the wrong target audience?

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 content marketing campaign.

What you spend goes directly into your ROI formula. For example, if your content marketing campaign costs $2000, this goes into your ROI formula as (Gains – $2000)/$2000 = ROI.

What Are My Baselines?

Recording your baselines, or benchmarks, helps you actively see the returns in your digital advertising strategies. 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.

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 returning 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 4-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 = 900% 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 in your marketing tools, 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% monthly or annual 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. Low ROI could mean that your message doesn’t resonate with potential customers. On the other hand, it could mean that you aren’t correctly targeting your ideal customer at all.

Dumping money down the drain on useless advertising, marketing or promotional efforts seems to be an obvious pitfall to avoid – but it’s 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 for 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 about how to use the ROI formula for your business.

Editor’s Note: This article has been updated and edited for accuracy and today’s digital marketing services and challenges.