A Simple Visual Guide To Understanding Return on Investment
| 9 min read
Digital marketing is crucial for the survival of any business. But not every digital marketing strategy will work well for every business and will bring in profits. For example, while some businesses thrive on social media marketing, some might attract more prospects through content marketing.
As important as it is to try different digital marketing plans for your business, it is also crucial to invest in the campaigns that bring in more leads, traffic, and returns. And this is where calculating the return on investment or ROI for each digital marketing campaign is not only useful but is also extremely necessary.
Indeed, it is difficult to ascertain the exact value of ROI since there are so many variables involved. How do you know exactly how many returns you have generated when the customers are on a journey towards making a purchase? It’s not as straightforward as spending $1 and getting $2 because both the investment as well as the conversion is an ongoing processes.
Having said that, a valuation of sorts can be made based on the approximate cost of the investment made within a time frame against the returns you have received. When you compare the ROI values for different digital marketing efforts you have made for your business, it will be easier for you to decide on which investments to continue and which to stop.
And it is also important to calculate your overall business ROI based on your overall digital marketing spending, to understand how you are faring when it comes to your digital marketing efforts.
The method for finding out the total actual ROI is quite simple and can be explained easily, and we seek to do just that. This article aims to be a simple guide to help you understand digital marketing ROI better.
Finding Your Actual Return On Investment
Calculating the digital marketing ROI value may seem futile, considering the results are almost never accurate. But like it is mentioned above, what works for one business might not work for your company. A digital marketing strategy that brings in truckloads of profit for even a similar business might prove to be futile for you. It is, thus, not only foolish but also very expensive to invest in marketing campaigns based on trends, competitor analysis, or anything else other than solid data, which is provided by ROI.
To find out the ROI for your digital marketing, you can use this simple mathematical formula –
There are other factors to consider while calculating ROI for each digital marketing plan that are not shown in this equation but are equally important.
Suppose you have invested in two separate digital strategies which have left you with different profit values. The higher profit value will then be concluded as the more profitable investment. But, factors like time period remain out of the equation. The one with the higher profit value may have required a longer time period to show returns, whereas the one with the lower value may have contributed to profits much earlier.
As a solution to this, assuming the time period to be the same for the marketing plans is important in order to reach a fair conclusion. This helps you to determine the profitability of each marketing strategy, hence, making your digital marketing decisions considerably easier.
However, when calculating your overall digital marketing ROI, there are other assumptions and variables that must be taken into account other than the time period. Let us take an in-depth look into those factors.
Assumptions And Variables
The first assumption or variable you need to set is the standard of overall ROI. There are two possible results that can be retrieved from the mathematical formula of ROI that has been provided above. If you end up with a negative value, it signifies that the costs have exceeded your net gain amount. This implies that you will suffer losses if you choose to keep investing in that particular plan. On the other hand, if the result is positive, you can rest assured that there will be some kind of profit. It is then up to you to balance your stakes and determine which marketing plan is more profitable and you should keep investing in.
Digital marketing ROIs are usually depicted as a ratio. The ideal ROI is accepted to be 5:1, meaning you invest $1 to receive $5 as a return. An ROI ratio of 10:1 or more is considered exceptionally good, whereas an ROI of 2:1 is considered profitable but not worth investing in any further. Of course, you can set your own business standard as well as a standard ROI for each marketing campaign you invest in and strive to achieve that ROI. But keeping this standard constant for all your marketing campaigns will aid in easier decision making through fair comparison.
Apart from assuming a set standard, there are other assumptions and variables to consider when calculating your total ROI. Some of which are as follows:
One Time Investment
The cost of any marketing campaign is usually not a one-time investment but an ongoing one. However, as the first assumption, it is important to consider your digital marketing cost as a one-time investment plan to make the calculation easier. You can calculate the total spend for a time period or the budget allocated for the same as the one-time investment to help with the calculations.
Monthly Marketing Overhead
The monthly marketing overhead is over and above what you directly spend on a digital marketing campaign. For instance, suppose you spend $1000 on your digital marketing in a month. Only considering this amount as your cost of investment would give a wrong ROI since there are some indirect costs involved, which are the marketing overheads.
The marketing overheads can be simply described as the cost incurred by a business in marketing its products or services to customers. It includes costs like the salary and commissions of marketing professionals and the sales team who are involved in the campaign. You have a calculate an approximate value and add it to the cost of investment for that particular campaign.
Monthly Paid Media Budgets
When calculating your total business ROI for digital marketing, you need to take into account the monthly paid media budgets into your investment cost. There are one-time digital marketing campaigns, and then there are the ongoing ones. To get a clear picture and as accurate a value as possible of your digital marketing ROI, you need to calculate both. Paid media can be ads on search engines and social media. You have to consider how many leads are being generated against the amount you are spending on these campaigns. Ultimately, the aim is to have more conversions, leads, and customers than you spend on acquiring them.
Total Conversions
The total conversion is the total number of leads you have generated through your digital marketing and how many of these leads turned into paying customers. Do note that not all digital marketing campaigns have the same goal. For example, the aim of content marketing is to bring in traffic to the website, whereas the goal of a pay-per-click is to bring in leads. Indeed, it becomes a little complicated to account for total conversions when the aims of different campaigns are different. But since the end goal of any marketing strategy is to end in paying customers, considering how many have actually made purchases from your business should make for the total conversion.
Average Value Per Conversion
So, you know the number of paying customers who have come in because of your digital marketing efforts. The next variable you need to find out is how much each customer has spent and calculate the average. The reason is even if a hundred customers make purchases from your business because of your digital marketing efforts, the value is minimal, and the overall ROI will not be less. Hence it is crucial to calculate the average value of a converted lead from your digital marketing strategies.
Monthly Revenue Generated
One of the variables you must find out when calculating your total ROI is the monthly revenue generated because of your digital marketing plans. Why, you ask? The simple answer is that for different kinds of businesses, there are different seasons and reasons when the sales, traffic to the website, leads, and conversions go up. If you just find out your total ROI and not your monthly revenue generated, you will not be able to take full advantage of the seasons and reasons when people make more purchases from you. For example, if you find out that you have consistently sold more during the months of July and August, you need to find out which marketing campaigns brought in the highest number of leads that resulted in conversions and then spruce up those marketing plans during those months in future as well, to keep making high profits and increasing your overall ROI.
Other Variables
There are numerous other variables that can have an impact on your business’s digital marketing ROI. For example, the marketing plan that brought in the most profit, the duration of running each digital marketing campaigns, when you started with your digital marketing efforts, the kind of digital marketing strategies you are investing in, and so on.
The Real Reason You Should Spend Money To Get Found Online
Whatever is your digital marketing ROI, do note that it takes time to build up your digital marketing efforts and for the plans to start showing results. If your digital marketing ROI is not as per your expectations, these statistics show why you should keep working on your digital marketing campaigns to improve your strategies:
- 85.4% of people search online for information
- 76% of retail search ad spend is accounted for by Google ads and constitutes 85.3% of clicks on the search engine.
- 84% of C suite and 76% of B2B buyers accept that social media has influenced their purchase decisions.
- Over 3.6 billion people are on social media as of 2021, and the number is projected to reach 4.41 billion by 2025
- According to Google, businesses earn $8 against every $1 they spend on Google Ads.
- 59% of people say they research on Google before making a purchase decision.
Hopefully, the above-mentioned data and statistics are enough to show you just how effective digital marketing is and why you should continue working towards finding just the right mix of digital marketing strategies that work for your business. And to find this right mix, one of the best ways is to calculate the ROI of each marketing plan as well as the overall ROI for your digital marketing efforts.
Final Words
Now that you understand and know what actual ROI is and how to calculate it for your digital marketing efforts, utilize it to hype up your digital marketing strategies, find the best mix of online campaigns that are most effective for your business, and grow your company.