As a digital marketer, you are responsible for a range of tasks. There is no denying that a major part of your job is to develop and execute marketing campaigns, but tracking their performance is also one of your duties.
You need to evaluate whether your marketing strategies are performing as expected, evaluating their impact on profit and the company’s success. That is why you measure return on investment, comparing the investment in marketing efforts with the profit made from them.
Measuring ROI in digital marketing gives you insights to create data-driven strategies, prepare for the future, and make informed decisions. Marketers have to meet one constant objective, which is to increase ROI.
In this blog, we will discuss digital marketing ROI in detail, including its definition, importance, ways to improve it, calculation, and more.
What Is ROI in Digital Marketing?
Digital Marketing ROI is a popular business concept for measuring profit and loss through digital marketing campaigns. It basically attributes revenue and growth to the impact of digital marketing efforts and the amount spent on them.
By calculating digital marketing return on investment, marketers can assess if they efficiently allocated and spent the given budget. They also analyze the degree to which their marketing initiatives contributed to the revenue growth. A positive ROI shows that the marketing campaigns generate more money than what was spent to create them.
Formula to Calculate ROI in Digital Marketing
Marketers measure ROI to justify their spending, allocate a budget for campaigns, and determine the effectiveness of different marketing strategies. The additional metrics used to calculate digital marketing ROI are known as vanity or soft metrics. Some common examples are website visits, brand impressions, and downloads. Marketers also use various tools to calculate ROI, which demands proficiency. Hence, we would recommend joining a digital marketing course where you learn about digital marketing ROI and ways and tools to measure it effectively.
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Importance of ROI in Digital Marketing
Measuring ROI in digital marketing is crucial as it helps us determine what’s working and what’s not. We can evaluate the success of marketing campaigns, assessing if they met our expectations or failed to generate results. If we don’t calculate ROI, it will lead to wasted marketing resources and lackluster results.
Tracking digital marketing ROI enables us to assess the success of our marketing initiatives, identify areas for improvement, and take corrective measures. Based on our calculations, we can fine-tune marketing campaigns.
For businesses, ROI is essential to make informed business decisions and optimize marketing efforts. For marketers, it serves the following purposes:
- A range of online and offline marketing mix combinations demand significant funding and resources. Marketers can distribute the available budget depending on which strategies, platforms, and efforts generate the maximum revenue.
- Budget allocation is one of the primary aspects of marketing initiatives. Marketers need to justify their efforts and total spending to secure budget and resources for current and future marketing campaigns. Hence, they calculate ROI to show the results delivered and ensure they are moving in the right direction.
- Marketers track the ROI of not only their campaigns but also their competitors’ to analyze how they are performing and what’s working for them. They track available data to estimate the ROI of different competitors in the same industry and create competitive strategies to gain an edge over others.
- The most important part of running marketing campaigns is measuring their success, which serves as a reference for future strategies. Using ROI, they can establish targets and understand the impact of each marketing method on revenue growth. Also, they can create a better marketing mix to generate more leads.
How to Calculate Digital Marketing ROI?
Now, let’s understand how to calculate ROI and the various factors involved in the calculation.
ROI in Digital Marketing Formula
Please check if we can make similar images for all formulas
To calculate net profit, you must subtract total marketing cost from revenue and divide the answer by total costs. If you want to convert it into a percentage, multiply it by 100. Here is a simple formula to determine net profit:
This means we can also calculate ROI using the following formula:
Let’s take a look at an example for clarity. Suppose you have invested ₹10,000 in your digital marketing campaign and earned ₹40,000. So, here’s how you will calculate ROI:
((40,000-10,000)/10,000)*100= 300%
If you want to express ROI as a ratio, divide net profit by total cost. The number you’ll get as an answer is your ratio compared to 1.
Taking the above example, we will divide our net profit, i.e., ₹30,000, by total cost- ₹10,000. The answer is 3. So, the ratio is 3:1, which means for every ₹1 spent, we earned a return of ₹3.
If you don’t know net profit or revenue, there is an alternate formula for calculating ROI.
Here’s the meaning of every element used in the formula:
Number of leads- Leads are people who express interest in your product, service, or brand. This converts them into potential clients. So, it refers to the number of leads you generate through your campaign.
Lead-to-customer rate- This refers to the percentage of leads who turned into paying buyers. So, if you get 100 leads but only 40 people buy your product or service, then the lead-to-customer rate is 40%.
Average order value- It is the average amount customers pay to buy your product. Average order value is helpful while changing pricing and offering discounts.
Cost or ad spend- It is the total amount spent on creating and executing a marketing campaign. It includes costs incurred on ads, tools, marketing services, team salaries, etc.
Metrics to Track to Calculate Digital Marketing ROI
Now that you are familiar with ROI, its meaning in digital marketing, its importance, and the method used to calculate it, let’s understand the different metrics used to measure ROI. We mainly consider two primary factors while measuring ROI- the cost and the result.
While calculating digital marketing ROI, we track metrics directly related to revenue, profit, and other aspects associated with the business goals, such as conversion rates, leads, cost per lead, average order value, etc.
The following are the useful metrics to calculate ROI in digital marketing:
- Cost Per Lead (CPL)
- Cost Per Acquisition (CPA)
- Lead Close Rate
- Click-through Rate
- Return on Ad Spend (ROAS)
- Average Order Value (AOV)
- Customer Lifetime Value (CLV)
1. Cost Per Lead (CPL)
If the focus of your marketing campaign is to collect leads through the website, you must know the cost of each lead, i.e., the amount you paid to acquire each lead. Compare the cost per lead to the worth of each lead to determine whether you achieved a positive result or not.
If the cost of each lead is more than what you earn by closing the lead, it shows a negative ROI. If the cost per lead is less than the amount you earn from that lead, it’s a positive ROI.
Knowing the cost per lead helps you analyze the performance of your marketing efforts. You gain insights into the data required to develop future marketing strategies and budget decisions.
Formula for Cost Per Lead
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2. Cost Per Acquisition (CPA)
Many marketers and businesses operate only on cost-per-acquisition models, where they pay for sales or leads generated based on the set goals or amount. CPA is the amount you spend to make a sale.
Calculating CPA helps you better understand your ROI, as you clearly know how much you must earn from each sale to attain a positive ROI.
Formula for Cost Per Acquisition
3. Lead Close Rate
You may know how to track total leads. However, do you know how many of those leads are converted into paying buyers? That is why you need to calculate the lead close rate, a crucial metric for calculating the return on investment in digital marketing.
This is an important metric because it helps you evaluate the financial value you get with every closed lead. Also, you can determine the number of leads required to achieve the set ROI goals and establish targets for the sales team.
It allows marketers to ensure that their marketing initiatives generate the desired profits. They can assess the quality of leads and adjust their targets to attract more qualified leads. Many businesses use this metric as a control against new marketing strategies.
You can measure lead close rate based on the device, channel, characteristics, demographics, and other factors. When you segment your leads, you can find out which channels and markets to focus on to attain higher ROI.
Formula for Lead Close Rate
4. Click-through Rate
Marketers calculate click-through rate (CTR) to measure the performance of their paid ads, email links, search result listings, and other marketing campaigns. It tells them how many people saw their ads or listings. A low CTR means adjusting their paid ad marketing strategy, copy, or design to generate better results. Higher CTR means higher ROI.
Formula for Click-through Rate
5. Return on Ad Spend (ROAS)
Return on ad spend is another important ROI metric because it helps marketers review the performance of campaigns, predict future scenarios, and compare channel spending. They can evaluate how well their paid ads are performing.
ROAS shows the total profit earned through ad spend and the amount spent on paid ads. Businesses aim to achieve three times their investment.
Formula for Return on Ad Spend
6. Average Order Value (AOV)
Every business owner feels overwhelmed seeing a rapid increase in the number of orders. It’s a great sign of profit and success. However, it is equally important to track the value of the average ticket to know the real impact.
Average order value is one of the key digital marketing ROI metrics to analyze profits and manage revenue growth. It also helps you with profit reporting.
Even a slight increase in AOV can generate a significant profit margin. Small actions, such as enhancing user experience and offering up-sell opportunities, can make a significant difference in AOV.
Formula for Average Order Value
7. Customer Lifetime Value (CLV)
To understand the ROI of your marketing initiatives and get a clearer picture, you need to calculate the average customer lifetime value (CLV). It refers to how much a customer is worth to a business over the time they remain a customer of that brand.
For example, if you spend ₹100 to acquire a lead and convert it into a paying buyer, and they buy a product worth ₹40, it shows a negative ROI. However, if the customer spends ₹40 every 6 months for the next 5 years, it changes the whole picture. Now, spending that ₹100 seems worth it. Right?
It doesn’t mean a business has to face a loss for every first-time client. However, if an initial investment generates long-term profit, we can consider the first sale as an expense, assured of the profit soon.
Calculating CLV helps businesses keep their marketing costs low and focus on a client’s entire lifetime. Businesses prioritize building customer relationships rather than just an individual purchase. It also enables them to get an idea of how much they can spend to acquire a single client while sticking to their ROI targets.
Formula for Customer Lifetime Value
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How to Improve ROI in Digital Marketing?
After learning the basics and metrics, it’s time to examine a few ways to improve ROI in digital marketing. Here are eight steps that will come in handy while developing marketing campaigns.
1. Establish Clear Goals
The first step to increase ROI is to set clear and well-defined digital marketing goals. It helps you lay down a plan and move in the right direction. You can accomplish the targets and track your progress continuously. Make sure you have a SMART goal, meaning it must be specific, measurable, achievable, relevant, and time-bound.
Specific- Your goal should be clear and specific. For example, increase ROI by 40%.
Measurable- You must be able to measure your progress at every step through data and report results showing accurate numbers.
Achievable- Your goals must be realistic and attainable. Be ambitious, but don’t keep targets that are impossible to achieve.
Relevant- ROI goals should align with your business goals. So, if your goal is to drive more sales and revenue, then thousands of likes and comments on Instagram are of no use unless they contribute to sales.
Time-bound- Have a timeframe to achieve your goals and set ROI. When you have a time-bound goal, you are more motivated and strive hard to achieve it within the stipulated time.
2. Have a Plan
The next step is to create a detailed plan, which enables you to track ROI and identify your strengths and weaknesses. Depending on your digital marketing strategy and platform, you must know the right metrics to track and calculate.
The common metrics to track are leads, conversions, and website traffic. However, the right metric depends on your goals and type of campaign. Also, use the appropriate tools, such as Google Analytics and SEMrush, to track ROI. Google Analytics allows you to track sales, leads, and more.
3. Monitor the Right Metrics
To increase ROI in digital marketing, it’s important to understand the relevant KPIs and metrics for different types of marketing campaigns. You must also know which metrics to ignore. The metrics must be according to the business goals. For example, if the business aims to achieve more sales, you need to track revenue.
Please note that you can track multiple metrics for each campaign, but they must be relevant to the overall business target. Other key metrics are click-through rates, conversions, cost per lead, etc. They help you evaluate the total number of people who have taken some actions toward buying, which matches the main business goal, i.e., increased sales.
Other metrics to measure when your goal is to increase sales are:
Cost Per Acquisition- The amount you spend to acquire a customer.
Conversion Rate- The percentage of leads or visitors that converted into paying buyers.
Customer Lifetime Value- The worth of a customer to your business over the time they are your customer.
If your business goal is to increase brand awareness, then you must calculate the following metrics:
Referral Traffic- The total number of users who visited the website through links on other sites.
Direct Traffic- People who visit your website by searching for its name on Google.
Social Media Mentions- The number of times your brand or product was mentioned on social media.
Another important point is that you must avoid vanity metrics. They can be tempting for paid or organic marketing campaigns, but they are empty measurements that hardly tell you anything valuable about a campaign’s performance.
Vanity metrics create excitement and look amazing on the surface but generate no meaningful results. For example, social media followers, raw page reviews, downloads, registered users, and new users per day. These metrics distract you from what matters and can hamper a campaign’s performance.
What you consider vanity metrics depends on your marketing and business goals. For example, if a business wants more attention and wish to grow its audience, then social media followers is an important metric. However, if a business wants to generate more sales, then measuring followers is a distraction.
4. Experiment with Marketing Channels
You don’t need to mark your presence on every online platform and channel. However, it’s important to pick the right platforms, be it two or more, to avoid missing out on any leads. Research a bit about your industry and competitors to find the best avenues and channels to experiment with initially.
For example, if your brand is available only on Facebook, you can create profiles on Instagram and Twitter as well to establish it and connect with more people. Also, if you are just leveraging organic methods to increase traffic, you can include paid campaigns to drive better results.
To know which platforms work best for your company, start by understanding a buyer persona. It will help you create an image of an ideal customer. Now, assess the type of users on every social media channel and see if they align with your target audience.
Competitive research is also a great way to identify the right channel for your marketing campaigns. If your competitors generate leads and build audiences on Instagram and YouTube, you should immediately mark your presence on these channels and include them in your marketing strategy.
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5. Identify Areas of Improvements
There can be various underperforming metrics. You must identify them and take measures to improve them. For this, take a closer look at your buyer’s journey, analyzing all the stages they go through before buying a product.
For example, you must know the number of times they visit your website or check a product before adding it to the cart and making payment. If you think your blogs are not attracting as many clicks as you expected, then optimize content for a better experience.
Also, zero in on the important pages that would be helpful for visitors to make buying decisions. They can be a product page, blog post, or product comparison page. Create a paid social media funnel to retarget your customers or visitors and customize a sales retargeting campaign. When your campaign covers areas of improvement, it streamlines the entire buying process, starting from brand awareness to converting and paying.
6. Create Valuable Content
You may spare no effort to create a high-quality and optimized blog post. However, sometimes readers don’t connect and respond to it. This can result in negative ROI from your marketing campaigns.
To turn this into a positive digital marketing return on investment, focus on providing value to prospects through your content. You can try the following methods to create high-value content:
- If you are frequently pitching your products or services on social media, you must stop doing it now. These posts don’t offer any value to customers. Also, they hardly provide any insights or helpful information. Read comments by visitors and users and then create content that answers their queries. You can also share tutorials to show you how to use your products. Your motive should be to offer people what they want and not what you want to give them.
- Your social media captions must align with your brand voice and tone. Also, read comments to learn how your prospects talk and create copies accordingly. Your CTAs must compel users to take prompt action.
7. Test and Optimize
Now that you have a plan, know high-performing channels, and understand the secrets to creating valuable content, let’s move on to testing and optimizing your marketing campaigns. You will need to dig deeper into the available data to assess different aspects of your marketing initiatives and take action to improve them.
You can run different tests on any campaign to evaluate every aspect, including your website design, content, channels, etc. One popular and useful test is A/B testing, which you can run using Google Optimize, a free tool.
For this, create two versions of your ad or landing page design. Show these versions to two groups and see which generates better reactions and responses. Stick to the version with positive results and test the nest element the same way. This helps you improve your marketing efforts continuously and achieve higher ROI.
Another method is to analyze data and uncover insights. For example, if data reveals that Instagram posts with a direct link to the website work best, then invest money and resources to create such Instagram posts. You need to develop content that resonates with your audiences.
Moreover, determine issues and bottlenecks that hamper the conversion process and resolve them using data.
8. Use Marketing Automation Tools
While calculating ROI, most businesses focus on the number of clicks, user interactions, and revenue. However, another aspect of improved ROI is decreased costs, which significantly affect profit and ROI. So, if you want to reduce marketing costs, you need to eliminate manual tasks, especially repetitive ones that keep your team busy. With fewer repetitive tasks, your team can spend more time on productive and higher-value activities that contribute to ROI.
Hence, you must switch to automation tools that help marketers enhance their efficiency and enable them to achieve more. The marketing automation industry is expected to touch $6.4 billion by 2025.
The reason for such rapid growth in the market is these tools maximize ROI by streamlining marketing efforts. They handle repetitive tasks and help marketers improve their campaigns through data analysis. You can utilize these tools to send emails at fixed intervals or to post on social media. They are also used for tracking leads, personalizing content, and segmenting audiences.
What is a Good ROI in Digital Marketing?
To measure digital marketing ROI, you must be familiar with the total amount spent on a marketing campaign and the revenue earned from it. Your marketing budget can vary depending on various factors and include expenses incurred on social media ads, marketing tools, content creation, and influencer marketing. Now that you know your marketing spend and earnings, apply the formula to calculate ROI.
Next, it’s time to assess if your ROI is good or bad. Generally, marketers consider a 5:1 ROI ratio good for a business. It means the business is earning ₹5 for every ₹1 spent on a campaign.
If ROI is 10:1, it is considered exceptional returns. However, there are various rules and guidelines to calculate ROI, and a business’ ROI targets vary based on multiple factors. Also, what is considered a good ROI can also depend on different aspects.
If a company’s ROI ratio is 2:1, it is considered unfavorable because the cost of the campaign and overhead expenses of an organization will break even with total spending and returns. So, companies target more than 2:1 to make a profit and run a business successfully.
However, if overheads are lower than 50% of the sale price, then a lower ROI ratio is also acceptable. So, it’s important to consider various factors, such as margins, overhead costs, and industry standards, to evaluate whether the ROI is good or not.
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Digital Marketing ROI FAQs
The full form of ROI in digital marketing is Return on Investment.
Tracking and measuring return on investment is important because it helps us evaluate the effectiveness of our marketing campaigns and efforts. We can analyze if our resources and time produce the best result and make appropriate improvements wherever required. It also helps us choose the right tools and technologies. Also, we can make data-driven decisions, optimize marketing initiatives, and increase profitability.
Determining digital marketing ROI can be challenging and tricky. You can have measurable insights for PPC and social media campaigns, but measuring the effectiveness of videos and blogs can complicated. However, the following steps can simplify the measuring process:
Set realistic goals
– Choose KPIs and tools
– Track conversion rates
– Determine revenue
– Calculate the total amount spent
– Analyze data
– Calculate ROI
– Test constantly
– Monitor metrics
– Make adjustments and improvements
Vanity metrics are analytical elements that marketers can measure, but they don’t signify real return on investment. They make businesses look good online but hardly help track the performance of marketing campaigns. Marketers can measure vanity metrics to appear to be improving, but they don’t provide actionable data or anything required to move forward in a meaningful way. Common examples of vanity metrics are page views, number of social media followers, likes, comments, running total of downloads, sentiment scores, etc.
While calculating ROI, it’s always best to use advanced tools to get accurate and faster results. The top tools to measure digital marketing ROI are:
– Cyfe
– Google Analytics
– Kissmetrics
– Buffer
– Planful
No matter what marketing strategy or platform you use, make sure to monitor the following factors to determine the success of your campaign:
– Production costs, which include services, supplies, software, etc.
– Time taken to create marketing material.
– Page analytics to analyze if the content drives expected landing page traffic.
– Promotional costs spent to advertise the brand.
– Non-financial returns, such as unexpected traffic boosts, social media engagement, and bonuses from the campaign, as they enhance brand awareness.
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Conclusion
Calculating digital marketing ROI depends on multiple factors, including industry, company size, audience, business goals, and more. Simply measuring ROI may not always be sufficient to analyze the success of a marketing campaign. Evaluating other digital marketing KPIs that align with the bottom line and overall objectives is also helpful.
However, if improving ROI is the primary concern, you need to take several steps and try different tactics, from choosing the right metrics to conducting tests. Find the areas for improvement and experiment with various marketing channels for long-term benefits.
If you want to learn digital marketing and aspire to make a promising career in the industry, then sign up for WsCube Tech’s digital marketing course now that focuses on practical learning and hands-on experience. By the end of the training, you will master basic and advanced concepts of digital marketing, becoming career-ready in no time.
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