When you’re deciding whether or not to invest in online marketing, you’ll typically be asked to provide a Return on Investment (ROI) analysis. What is ROI, and how do you calculate it? Let’s take a look.
What is Return on Investment (ROI)?
Put simply, Return on Investment (ROI) is the measure of how much profit a company/individual gets from an investment (or spend). The profit (or ROI) generated from a marketing activity is usually attributed to that activity. So, if you spend $500 promoting a product and generate $1,000 in sales, your ROI is $500 / $1,000 or 50%.
The reason this is usually asked of online marketers is that digital marketing is a broad category that can include a variety of marketing activities conducted online. These activities can be highly sophisticated and expensive to run, so it’s important to know how much you’re really getting back for your investment.
How to Calculate the ROI of Your Online Marketing Efforts?
There are a number of ways to calculate the return on investment of your online marketing efforts. While the specific methodologies vary by industry and by product, there are some general best practices that apply across the board.
Look at the Top Line.
The most straightforward way to calculate the ROI of your online marketing efforts is to look at the top line. This is the summary analysis of your marketing activities performed for a specific marketing goal. The top line shows you the total income (or profit) generated from all your efforts, and it’s the most basic and most fundamental analysis of your ROI. It doesn’t get any more fundamental than this!
If you’re not seeing the results you want from your online marketing efforts, then it’s time to look at your top line.
Take Marketing Activities Individually.
Once you’ve determined your top line, you can then take the time to examine the components that made up that line. This way, you can identify areas where you might be able to make improvements and increase your returns. The best practice here is to look at each activity in turn. Even if you had the best overall top line in the industry, you might be able to gain more return if you were able to optimize a certain activity or set of activities.
Focus On the Metrics That Matter.
Although you’ll never get around the need for a profit statement, you shouldn’t just look at the total income or profit from your marketing activities. You should also look at the metrics that matter. So, while you might be able to get a handle on the total number of visitors to your site, the bounce rate, and the like, the metrics that matter most are typically sales-related. In many cases, you’ll be able to get an estimate of how much revenue your site generated from a given marketing activity. Take the time to examine these metrics closely so that you can determine the true ROI of your online marketing efforts.
To give you an idea of how this might look, here’s an example of a marketing plan for a single website:
Marketing Plan Example
“The purpose of this plan is to generate $1.5 million in revenue from organic searches by increasing website traffic and converting this traffic into paying customers.”
This plan aspires to generate $1.5 million in revenue from organic searches. To do this, the plan calls for the website to perform the following activities:
- Increase website traffic by 10%
- Convert this traffic into paying customers via SEO
- Continued SEO efforts to bring in $2.5 million in additional revenue
- Generate $500,000 in profit
- Scale the business
- Manage web content
- Run email marketing campaigns
- Measure marketing results
The plan above is very general in nature and focuses on increasing web traffic and growing the business. As you can see, it includes a lot of activities that might not even seem relevant to calculating the ROI. But, if you trace the income back to its sources, you’ll see that almost all of this income is attributable to SEO.
SEO, or search engine optimization, is a form of online marketing that helps your website show up when potential customers search for your products or services on search engines like Google or Bing. (Think of it like getting found on Google rather than having to pay to be listed on the search results page.)
If you’ve ever been around the internet, you’ll know that SEO can be a tricky and often time-consuming process. It usually involves a lot of trial and error to find the right combination of tactics, and you’ll need to constantly be adjusting your strategy based on Google’s ever-changing algorithms. For this reason, many businesses avoid investing in SEO and keep their efforts focused on paid advertising instead. However, the advantage of this approach is that it is much easier to measure the effectiveness of paid advertising. When you have a clear goal in mind—like getting a certain number of people to click a link or visit a specific webpage—you can easily determine how much that cost you in terms of both dollars and time. (You might also want to consider looking at HubSpot’s Cost Calculator to help you work out the exact figures.)
Calculate The ROI Of Each Marketing Activity
Once you’ve determined your top line, you can then start breaking it down into smaller pieces so that you can examine each activity individually. The key to doing this intelligently is to take your time and really look at how each activity contributed to the top line. (You might also want to use a tool like Google Analytics to help you track the success of individual marketing efforts.)
For example, if you see that getting more website traffic leads to more sales and a higher bottom line, then you know that increasing website traffic is a key priority. However, if that’s not the case and the top line is improved while the bounce rate is the same or even decreased, then you can safely bet that part of the reason for this is due to an increase in the quality of the website traffic. (In this example, let’s assume that getting more website traffic results in 100% of the traffic converting into paying customers.)
Now, let’s take a look at some of the other activities included in this plan and how much ROI they might generate individually:
Increasing Website Traffic
In the example above, we saw that getting more website traffic is a key priority, but what exactly does that mean? It means getting the maximum number of people to visit your website as often as possible. Let’s say that you implement a content strategy where you consistently publish useful and valuable information that helps your target audience solve their problems. In this case, you might see a massive increase in the amount of people that visit your site each month. (Let’s also say that these people actually spend a decent amount of time on your site.)
What’s important to note here is that even though getting more website traffic is a key priority, you must also take the time to ensure that each visitor to your site is valuable. This might mean testing out different content strategies or figuring out the right blend of videos, articles, and so on. As marketers, one of the most important things we can do is to continuously find new ways to measure the effectiveness of our efforts and improve and optimize our campaigns.
Converting Website Traffic Into Customers
Once you’ve determined how much traffic you’re getting to your site, you can then determine how much revenue you’re generating from this traffic. This is known as the conversion rate of your website. A high conversion rate is desirable, but don’t expect this to be easy. It typically takes a lot of testing and analyzing to find the right combination of strategies to achieve this. (In some cases, it might also involve purchasing a certain product or using a particular service to improve your conversion rate.)