Business owners need to understand how to measure ROI in digital marketing as it is crucial for businesses striving to maximize their returns on investment. ROI, or Return on Investment is a financial metric used to measure the profitability of an investment to its cost. In simple terms, it can be defined as a measure of how much profit you are getting from spending a particular amount as an investment.
Accurately tracking and analyzing the ROI of your digital marketing efforts not only helps in assessing the effectiveness of your campaigns but also guides future strategies to ensure optimal performance.
To give a very simple analogy, it is like calculating how many candies will you get in a big packet for the amount that you are spending. If one packet costs 300 Dollars and has 30 candies, then each candy will be 10 dollars each.
Calculating and knowing about your ROI is important because it helps you evaluate how efficient any investment is. This investment can be on any luxury item, shares, strategies, campaigns, business, etc., but here we will discuss why ROI is significant for Digital Marketing and how to measure it.
WHY ROI IS IMPORTANT IN DIGITAL MARKETING?
The major reason for the significance of ROI is that it helps a business person see how fruitful their investment is. When one is aware of their ROI, they know what kind of investment is working for them, where to put more money subsequently, and where to decrease their investments. This increases the profit in the long term and helps in optimally using the resources.
In the case of Digital marketing, there are several channels that a company invests in. Keeping an eye on ROI helps the investor understand which channels are the most effective for them and which are not. Accordingly, it allows them to speculate about the right budget allocation for each channel. In the long run, it enables you to set realistic goals and targets. It also acts as a measure of accountability and justification for stakeholders, management, administration, clients, etc.
WHAT IS ROI AND HOW TO CALCULATE ROI?
To explain, Return on Investment in Digital Marketing, it is a measure of your online marketing campaign’s profits and losses.
A very simple formula to calculate ROI is –
(NET PROFIT/TOTAL DIGITAL MARKETING COSTS) * 100
To elucidate, for determining your NET PROFIT, you need to subtract your COSTS from REVENUE (REVENUE – COSTS).
For example, if your revenue is 50,000 and your cost is 20,000, then your Net Profit should be 30,000 (50,000-30,000= 20,000).
Now simply divide your net profit by your cost and multiply by a hundred, and your ROI will be 66.66%.
Another way to calculate your ROI without calculating it as a percentage is to express it as a ratio. To do this, you can simply divide your Net Profit by your costs. The result obtained will be your ratio compared to 1.
For example,
in the example presented above, your ROI as a ratio will be 30,000:20,000 = 3:2.
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Sometimes you do not know what your profit is. This may happen at the start of any campaign or strategy. Calculating your ROI is possible even in these cases. To estimate your ROI, you first need to know your approximate profit.
For this, the formula will be –
Predicted Profit/Returns = (Number of leads * lead-to-customer rate* average sale price)
Here, a lead is anyone who shows some interest in your brand, product, or service. You may call them potential customers. It is only a rough estimate. To make this more accurate, you need to multiply the number of leads by the Lead-to-customer rate, i.e., the average percentage of leads that convert to customers.
The average sale price is the price that customers pay when they first purchase a product or service.
This whole calculation may sound complicated, but it can be done in a matter of seconds in reality. Let’s take an example to understand this.
If you expect your new Digital Marketing Strategy to generate 1000 leads and your lead-to-customer rate to be 20%, whereas the Average sales price is Rs. 30, then the predicted return would be 1,000 * 0.20*30= 6,000.
With the predicted profit, you can calculate the predicted ROI using the formula mentioned below –
Predicted ROI = (Predicted return – Cost)/Cost*100
A point of caution here is that though these formulas can give you a fair estimate of your estimated profit, they do not take into account the outside variable factors that may impact your estimates. To get an all-round and holistic picture of the success of your marketing strategies and campaign, you must provide a calculation of your ROI with the metrics that can influence it but are beyond your control. Some of these are covered below –
How To Measure ROI In Online Marketing –
Focus on these 5 parameters:
1. PAGE VIEWS AND FEEDBACK –
A major factor that impacts your growth is the magnitude of attention you get. To stay profitable, you need to gain consumers’ attention. The best indicators of consumer awareness are feedback and page views. Thus, to get a real sense of how successful your campaign will be, keeping an eye on these factors can be helpful.
2. CLICK THROUGH RATE –
People who are interested in your products or services will click on your website, email, social media posts, etc. to learn more about them. Measuring this Click Through Rate (CTR) can help you determine which of your channels are getting the most attention amongst customers.
3. COST PER LEAD AND COST PER ACQUISITION –
Cost per Lead (CPL) represents the cost incurred to get the attention of the customer, whereas cost per Acquisition (CPA) is the cost needed to convert that lead into an actual, paying customer. Calculating these two metrics can help you in analyzing where exactly you are spending more and where there is scope for spending more for better results.
4. CONVERSION RATES –
Conversion rate is the rate at which leads turn into actual customers, which is the ultimate goal of all Marketing Strategies. The conversion rate, in the case of Digital Marketing, must be considered separately for each channel to get a more accurate picture.
5. CUSTOMER LIFETIME VALUE –
It is a long-term metric for measuring the success of any business. CLV is the average value that a customer will spend in the entire time that they engage with your business.
WHAT IS THE IDEAL ROI IN DIGITAL MARKETING?
After a detailed analysis of all the factors you need to consider to measure your growth, you must be wondering what the ideal ROI is that you can aim for.
Though this may vary from business to business, the commonly considered ideal value for ROI is a ratio of 5:1. But even this can be subjective depending on the requirements of each business and the conditions that they are working with.
Even while considering the ROI, it is important to consider the salaries of employees, raw materials, capital investments, EMIs, and other expenses that are incurred.
Another important factor to take into consideration is that the data that you are working with must be close to accurate. The accuracy of the data depends on the accuracy of the data used for calculations.
WHAT TO DO IF YOUR ROI IS NOT GOOD?
Improvement must always be at the center of all actions. If you feel that your ROI is not up to par, your next step should be to improve it.
You can start by setting realistic and short-term goals, focusing on your strengths, and also working steadily on your weaknesses. You can also re-distribute your resources accordingly. And finally, monitoring the impact of all your steps will prove crucial.
TOOLS TO CALCULATE DIGITAL MARKETING ROI
There are many tools and websites that you can use to easily measure your ROI. Some of these are –
1. GOOGLE ANALYTICS –
It helps in measuring metrics such as Page views, Bounce rates, Visitor Location, source of traffic, page value, conversion goal tracking, and assisted conversion value.
Also read 11 Benefits of Google Analytics for Data-Driven Marketing
2. CYFE –
It allows us to analyze results from various channels such as Advertising, Blogging, Email, Sales and Finance, SEO, Social media, Web Analytics, etc.
3. Hootsuite –
It mainly helps in tracking results from social media.
4. Sprout Social –
This is similar to Hootsuite as it helps in analyzing responses on social media, such as the content with the highest engagement, low performers, numbers of impressions, number of clicks to your website, etc.
To conclude, it must be noted that though ROI is very important, it is not all that you need to know to see how successful a strategy will be for your business. Measuring ROI must be a continuous process and should be considered along with changing conditions such as market conditions, Consumer behavior, etc. Utilizing the right tools and strategies, along with staying informed and focused, will help you achieve your goals.
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