It’s no secret that the world of digital marketing is chaotic and ever-changing. With the right tools, however, you can put your best foot forward and truly be ahead of the game.
What is ROI?
Return on investment (ROI) is often mistaken to be the same as profit margin, but it’s not. ROI is typically used to evaluate the success of a marketing campaign or a digital marketing strategy. Simply put, it’s the measure of how much money you’re generating (or losing) from a particular marketing activity. In this article, we’ll discuss how to calculate your ROI so you can have a better understanding of how much you’re actually gaining from your online marketing activities.
How to Calculate Your Profit Margin
Profit margin is usually the amount of money you make after you subtract the costs of the product. For example, if you sell a $20 item but spend $10 to make it, your profit margin is $10 (20% sales margin).
Profit margin does not take into account any of the expenses that are part of running a business, such as rent, utilities, staffing, etc. These are all part of the business’ expenses and are not included in your profit margin for that particular product or service.
A more precise way of measuring your profit margin would be to subtract your total direct costs (such as labor, materials, and inventory) from your total revenue. This is called “true profit.”
How to Calculate Your ROI From A Marketing Activity
Remember, the measurement for ROI is not about how much money you make but rather the results of your marketing activity. In most cases, you will need to track a few key metrics to properly calculate your ROI.
The first thing you’ll need to do is decide what metrics you’ll use to evaluate the success of your campaign. Keep in mind that you’re trying to calculate the return on investment from a marketing activity, so the metrics you choose should reflect that.
Once you’ve decided upon your metrics, take a few moments to think about how you’ll track them. Most digital marketers will use a combination of both hard numbers and metrics that are more qualitative in nature. For example, you might want to track the number of leads generated from a lead generation campaign, the number of customers acquired from a marketing campaign, website traffic, and the amount of social media engagement (i.e., likes, shares, and comments).
Your metrics do not need to be complicated, but you must make it easy for your team to understand how you’ve calculated your ROI. If you find that your team has questions about how you’ve arrived at a number, then you’ve either created too much work for no real value or you haven’t presented your data in a clear and concise manner.
Once you’ve gathered the required data, it’s time to put your best foot forward and calculate your ROI. Some companies like ClutchData give you the option to enter your revenue and expenses for the past three years, which makes calculating your ROI a breeze. Simply enter the figures for each period, and then you’ll see your ROI for each period. You can also use this feature to create a standard profit margin for comparison.
Where Do I Start?
If you’re just getting started or if you’re looking for a quick reference, the best place to begin is with your revenue. In almost all cases, your revenue represents the amount of money you’re actually making from the sale of your products or services. You won’t have access to your expenses unless you have a separate income statement from your tax service, and even then, it might be difficult to separate out these figures.
For example, if you’re selling products on Etsy and you use a service to process your payments, you’ll likely need to track both your sales and transaction fees to properly calculate your ROI.
Once you have your revenue, take a few moments to figure out what is included and what is not in your revenue. In almost all cases, your revenue will include payments from customers but will not include any of the expenses from the business (i.e., rent, utilities, etc.).
In some instances, your revenue might also include some of the fees charged by payment services (such as PayPal or Stripe) used to process payments. These are all part of the business’ overhead and do not generate revenue. In these cases, you might want to subtract these fees from your revenue before you start calculating your ROI. This will give you a better idea of how much money you’re actually making from each sale. To learn more, read our guide to frequently asked questions about EIS.
Why Should I Care About My ROI?
Let’s take a step back for a moment and ask why you should care about your ROI. Essentially, it’s all about measuring the results of your marketing efforts. In most cases, you’ll need to show your boss or the head of the marketing department your results to prove the value of what you’ve done. Your ROI is only as good as your ability to prove it. In some situations, you might also need to report your results to the IRS.
To calculate your ROI, you’ll need to start with your revenue. It’s usually best to begin with your total revenue for the past three years, which will give you a good idea of what is and what is not included. Once you have your total revenue, take a few moments to add up all of the income that is included in your revenue. This is usually easy to do, as sales taxes, shipping fees, and other forms of income often get accumulated and reported in an easier to understand fashion. Once you have your total revenue, it’s time to subtract your total expenses. Remember, expenses can be both visible and hidden, so be sure to account for all of the expenses that you incur.
It’s also a good idea to look into the nature of your expenses before you start calculating your ROI. In most cases, you’ll have a small number of fixed expenses that you incur each month (such as rent or mortgage payments, utilities, staff salaries, etc.). Once you have these expenses, it’s a matter of adding up how much you spend on each of these items and then dividing this total by the number of weeks you worked (i.e., 52).
In addition to these fixed expenses, you’ll have a number of variable expenses that vary from month to month. These are the expenses that are unique to your business, such as marketing costs, advertising costs, etc. It’s important to track these expenses, as they can help you better understand the true cost of your business.
Once you have your total revenue and expenses, it’s time to start calculating your ROI. Simply take your total revenue and divide it by your total expenses. In most cases, you’ll get a decimal place after the slash. For example, if you have a $10,000 of revenue and $5,000 of expenses, your ROI will be $10,000 divided by $5,000, or 2,000%. To learn more, read our guide to frequently asked questions about EIS.
What About My Margin?
Many businesses, including marketing agencies, don’t like to talk about their margins, as it makes the numbers less exciting. However, it’s important to track your profit margin and determine how much money you’re making from each sale. Keep in mind that your profit margin is generally used to evaluate the success of your marketing activity. As a result, it’s often the case that more attention is paid to this figure than is paid to your ROI. Here’s the problem: if you don’t know how you’re performing, it’s difficult to tell if you’re doing any better than you were the year before. In most cases, the profit margin will be the same as the sales margin, which means you’re not doing any better than you were the year before.
To learn more, read our guide to frequently asked questions about EIS.