How is it calculated
Return on Investment (ROI) is the measurement of value provided by an investment – it is the return you acquire relative to the cost of initial investment. ROI is calculated by taking the cost of the investment from the gain from investment, divided by the total cost of the investment.
Understanding your ROI
Understanding your ROI is key to determining the success or otherwise of your digital marketing campaign; a small amount of capital costs that generates a large amount of website traffic (assuming that was the goal of that campaign) suggests that the small initial outputs resulted in a high ROI.
Marketing ROI is hard to track, as it often doesn’t involve definitive quantitative measurements; instead, the first requirement of tracking your marketing ROI is to know your marketing goals, and devise what specific variables you want to track from there. You can’t track, and subsequently analyse, your marketing if you don’t know what your marketing is attempting to achieve. Often companies will use variables such as brand awareness, customer conversion rates, or final sales.
As the goals of marketing shift with campaigns, and the metrics tracked will change in accordance with this, it follows that there is no single guaranteed way of measuring your marketing ROI. However, there is a general formula which must be adhered to, in order to fully understand all aspects of your ROI for each campaign.
Firstly, it is imperative that you calculate your spending, or your initial ‘investment’. It is necessary to include all financial outlays, along with the cost of the marketing team and the costs of your tools and platforms.
Secondly, you need to calculate your ‘returns’. The exact method of calculating this will depend on the specifics of your business and how you measure outcome. High-street shops may calculate direct sales of the product featured in the marketing, e-commerce websites could calculate on-site sales – from this you should identify how many conversions you have had and the additional gains from these, generating your average conversion value. You could also calculate the increase of other variables such as footfall, or website visits as additional indicators of ROI.
Finally, you need to isolate these conversions, establishing how many were generated from your marketing. This tends to be difficult, as you can not necessarily establish causation from correlation, however by focusing on specific metrics that are directly linked to your marketing campaign these conversions can be calculated with a high degree of validity.
Working with a digital agency
Due to the difficulties of separating correlation from causation, many companies are turning to digital agencies to help them isolate causation and the direct effect of marketing mechanisms resulting from their campaigns.
Working with a digital agency will also allow you to extrapolate information gained from the behaviour of a single client. By identifying one client who matches your target profile, you can see how the client has responded to your marketing efforts, and utilise that data to evaluate the impact on all members of that targeted group. Digital agencies can also reverse engineer this from data, calculating how effective a specific marketing campaign has been on different profiles and categories of clients.
Ultimately, tracking marketing ROI requires clear goals from the outset, along with understanding which specific variables are to be measured, and how these variables are affected by your marketing. Once these have been established, you can analyse the specific variables, understanding the key areas where marketing is making a difference, and adapting your marketing strategy from this initial point. By using digital agencies, trends, client profiles and the direct correlations between marketing and results can be easily tracked and modified, making it easier to improve marketing strategic and constantly increase your return on investment.