Introduction and Guide to Digital Marketing ROI
Reporting & Analytics | ROI
One of the questions that we frequently get asked at Top Floor is, “what am I going to get for the money we spend on X (that’s a placeholder, not spend on the social media platform formerly known as Twitter)?” While that is a seemingly simple, and valid question, it is also pretty complicated and requires some leg work on the client end to answer. In the investment world, you find ROI by taking the net profit of an investment and dividing it by the cost of that investment.
Simple enough, no need to read further, thanks for coming to my TED talk! But how do you find the pieces that feed into your net profit and cost of investment? The purpose of this guide is to help you understand how to apply this investment principle to your digital marketing activities.
What is Digital Marketing?
I know what you’re thinking. “Top Floor does SEO so here comes the obligatory ‘What is’ paragraph to try and rank in Search Engines.” Normally I’d agree with you and scroll past this text, but I want to take the time to define what I mean when I say “Digital Marketing” as it is different depending on who you talk to. For the purposes of this post, I’m talking about anything you do online to promote or improve your website or business. This means it’s not limited to more traditional digital channels like SEO or PPC, but also includes things like UX changes you make to your website or commenting on an influencer’s post in LinkedIn. Those are all activities that promote or improve your company’s digital presence and can impact your ability to drive leads.
Why Measure Digital Marketing ROI?
Another pretty straightforward question but I think the answer is a little different depending on your role and goals in marketing. We typically find that the answer lies in one of the following three categories.
Prove Value to Stakeholders
Whether you’re a marketer that needs to show your boss the value in your efforts or you’re a business owner that wants to know for sure that your investment has been worth it, most people fall into this category. Oftentimes this goal comes from companies that haven’t traditionally invested in digital marketing and they want the assurance that it’s money well spent. If this sounds like you, use the guide below to not only show that your work is paying off but also to justify spending more. If what you’re doing is working, spend more and you make more.
Allocate Budget Strategically
This category typically applies to companies that are a bit more seasoned when it comes to digital marketing. They have a defined budget and just need to make sure the money is going to where it is going to be most effective. While they definitely still need to prove value, it’s usually when comparing two different marketing channels, as opposed to showing that they should be doing marketing at all.
A big part of marketing is trial and error, sometimes a LOT of error. But if you’re not effectively tracking the ROI of your efforts, you won’t be able to quantify the results beyond “wow, that didn’t work.” All kidding aside, this category can apply not only to testing new marketing channels, but also new messaging or targeting a different audience. If you have a benchmark for your performance, when you run your tests, you can put a number on the effectiveness of the change and make decisions accordingly.
A Couple of Disclaimers Before We Dive In
There are a few things I want to call out here before we start as I think context is important, I am a marketer after all. First, this guide is going to show you how to calculate the returns on your total digital marketing investment; I don’t advise applying this to one specific channel/effort and here’s why: it all blends together. For example, if you are running a paid search campaign but you’re sending them to your website that hasn’t been redesigned or updated since 2015, can you truly say “paid search doesn’t work?” Or did it struggle because people got one look at your site and ran for the hills? You can, of course, apply these learnings to a specific channel, just make sure you give it context and consider other factors that may have impacted the results.
Secondly, there is value in your marketing efforts that you will not be able to put a specific dollar amount on and that’s okay. Getting your company’s brand out there and in front of the right people pays dividends in ways that aren’t directly tied to the bottom line. For instance, your company attends tradeshows, sponsors industry events, and advertises (effectively) online. This means you’re getting your name out there and building a strong first impression with your target customer. Now when they do a search in Google for something they need and they’re faced with multiple choices, they are more likely to click on a link to a brand they’re familiar with than one they never heard of.
Finally, not all marketing efforts are designed to convert. Very few Directors of Sales & Marketing want to hear this, because let’s be honest, they’re usually sales people. A straightforward example of this is running a recruiting campaign. You’re not going to generate any sales from this, but you could find the next great employee and that can be just as valuable. So take the time to determine for yourself the value of your brand and culture, and factor that in when calculating your return on investment.
Which Metrics Help You Measure Digital Marketing ROI?
When I said WAY back at the beginning of this article that finding ROI requires some leg work by our clients, this is what I was referring to. As digital marketers, we have direct access to metrics like traffic, impressions, conversion rates etc… What we don’t have access to is the specifics of the sales, profitability, or lifetime value of your customers. In order to get the true value of your marketing efforts, you’re going to need to know the following metrics and I suggest that you calculate these with a consistent time frame in mind (6 months to a year).
Total Cost of Marketing Activities
Figure out the total amount of money you’ve spent on marketing activities, include things like:
- Advertising spend
- Online sponsorships
- Promoting social media posts
- Agency costs
- Hours spent by your internal team (if you want to get really crazy)
Cost Per Lead
While this isn’t essential for this particular calculation, I find cost per lead is good for benchmarking and measuring the impact at a channel level. Once you have your total cost of marketing activities, divide it by the total number of leads generated by these activities. Usually you can find that number in a tool like Google Analytics. Et voila! You have your cost per lead.
Total Revenue Generated
Use this metric if you have a CRM or other system of tracking not only your sales, but attributing them to a specific channel. If you have that, then you can pull the revenue generated from leads your digital marketing efforts created. I’d only recommend using this if you have an ecommerce business model or if you are looking for the short-term impacts on revenue. Otherwise you may be better off using Customer Lifetime Value.
Customer Lifetime Value
This is my favorite measurement on the impact to your business and one of two revenue numbers you can use if you don’t have a CRM that tracks lead source. I find that with most of our clients, once they get a new customer they tend to do business with one another for years. If that sounds like your company, then I recommend using the lifetime value of a customer in your ROI calculations. You’ll likely need to work with your accounting team and ask them for the average annual contract value of your customers as well as the average lifetime of your customers, then multiply the two numbers together. So if your average customer spends $50,000 per year, and the average lifespan of your customer is 5 years, your average Customer Lifetime Value is $250,000.
Annual Contract Value
If your customers tend to be more “one-and-done” or if you’re asked to get a more direct/time-constrained number as it applies to your bottom line, then you should use Annual Contract Value. You’ll still ask your accounting team for the average annual contract value of your customers, but you don’t need to bother them to find the average lifetime (your A/R team thanks you in advance).
Lead Close Rate
If you’re not using a CRM like Salesforce or Hubspot, you’ll need to work to find the percentage of leads your business typically converts into sales. Discuss with your sales team and try to get as accurate a number as possible. Hopefully you have some sales tracking systems, otherwise get a gut feel. If you get 1000 leads and you convert 400 of them into sales, your lead close rate would be 40%.
The ROI formula talks about your net profit so it stands to reason that you should be factoring the Cost of Goods Sold (COGS) into your digital marketing ROI. I also see this part left out in a lot of the ROI content available today. If you don’t have this number already, you’ll want to talk to accounting again and see if they can provide you with this number. They might even be able to do it by product or service line if you really want to dig deep, but we’re going to keep it simple here. Total revenue minus COGS, divided by revenue.
This number is going to vary from industry to industry and company to company, but for the purposes of this article, I’ll be using a GM% of 40%.
How to Calculate ROI in Digital Marketing
Now that we’ve got our metrics, we can use them to calculate our return on investment. Since we have a couple of ways to measure this, let’s set some example metrics in place to show the difference in calculating ROI:
- Total Revenue – $1,000,000
- Annual Contract Value – $50,000
- Customer Lifetime Value – $250,000
- Leads Generated – 50
- Lead Close Rate – 40%
- Gross Margin – 40%
- Cost of Marketing Activities – $120,000
We’ll start with looking at the short-term impact of marketing on revenue.
Using the equation above, we take the Total Revenue ($1,000,000) and multiply it by our Gross Margin Percentage (40%) to get our Profit Generated ($400,000), then subtract our Cost of Marketing Activities ($120,000) and divide that by our Cost of Marketing Activities ($120,000). That gives us an ROI of 2.33:1, meaning that for every dollar spent on marketing, we generate $2.33 in profit.
If you don’t have a specific revenue number, take your Leads Generated (50) and multiply that by your Lead Close Rate (40%), that gives you the number of customers generated by your marketing leads (20). Multiply that by the Average Annual Contract Value ($50,000) and that will be your calculated revenue from marketing leads ($1,000,000). Then you can use that as the Total Revenue number in the ROI formula to get 2.33:1.
While that’s a useful number, I still feel that to measure the true impact of marketing on generating new business, you need to factor in the Lifetime Value of a customer.
Calculate the number of sales, using either Total Revenue divided by the number of transactions or using Leads Generated multiplied by Lead Close Rate. Once you have that number, multiply that by your Average Customer Lifetime Value to get the total value of the sales made from marketing leads ($5,000,000). When using that number as our Revenue number in our calculation, we get an ROI of 15.67:1!
What is a Good ROI for Digital Marketing?
Now you know the ROI on your marketing efforts. But with any metric, if you don’t have context, it’s relatively meaningless. Naturally you’re wondering how your ROI measures up against others. The answer: it depends.
Ultimately the goal is to make more money than you spend, so in that regard, any positive ROI is “good.” However, we’re not trying to just get by so it’s important to set some goals to aspire to. When doing some research on this topic, I found that the most commonly defined “good” ROI was 5:1. But as I read through these articles, they were only looking at revenue generated, not the cost of production. So make sure you’re factoring in your actual profit margins as those conversations are more impactful.
So this metric truly depends on the profitability of your goods and services. If your GM% is high, say 70%, you’d likely be willing to spend more money to get new customers in. But if your margins are thing, like 25%, then you need to be more judicious in how you spend your marketing dollars. What you can do today is benchmark your current ROI and track the changes as you implement new or different marketing strategies.
What Are the Challenges of Measuring Marketing ROI?
There is no end to the list of challenges that marketers face when it comes to demonstrating their value to the business, the following three challenges are the most common and create the biggest roadblocks.
Not Tracking Sales Performance
In order to understand ROI, and not just from marketing, you need to have a solid system for tracking sales. Leads generated, their source (attribution), lead to opportunity, opportunity to sale, revenue generated… tracking these activities are essential to understanding the impact of your marketing on the bottom line. CRMs can be helpful but some can be very expensive, even tracking this in a spreadsheet would be a great starting point.
I touched on this briefly before, but tracking the source of a lead can be extremely challenging. I’ll give you an example that recently came up at Top Floor. We got a form submission from someone that had reached our site from organic search (SEO). Our account executive recognized the company that they worked for from a contact he made at a tradeshow and reached out. After a quick call, the contact revealed that they knew someone that worked at Top Floor and wanted to reach out since they have a need for our services.
How would you categorize this lead? SEO? Tradeshow? Employee Referral? The answer is not so simple, but you should determine how you give credit. There’s “last touch” (SEO), “first touch” (Employee Referral) or if you want to use a more advanced “multi-channel” attribution method. Whatever you choose, the key is consistency.
Unsure of what to call this, I decided on “Organizational Buy-In” because I think it does a better job of describing this challenge than “People.” There’s alway the human factor when it comes to business and this challenge comes in many forms. There’s the “Skeptic,” someone in the organization that is hesitant to give any credit to anything they don’t understand. There’s the “That’s-They-Way-We’ve-Always-Done-It,” someone that doesn’t think they need to change because the business has survived for X generations on referrals and “good work.” And then there’s sales people, who want to take all the credit for sales so they can justify their role and commissions.
One key step in getting Organizational Buy-In is to set expectations not only for your work, but also how the company is going to perceive that work. Let them know what you’ll need from them in order to be successful and get an agreement from all stakeholders involved into how you’re going to track the performance of marketing.
So What’s Next?
Hopefully you found this helpful and you can put this into practice. If you’re finding roadblocks, like not having tracking in place, don’t just throw your hands up in defeat. Put the tracking systems in place. The best time to start tracking was yesterday, the second best time is today. I’ll be publishing some follow ups to this article that dive into some more specifics, like benchmarking, setting up Google Analytics for ROI, and much more, so keep an eye out for those and if you’ve got any questions feel free to reach out to me at firstname.lastname@example.org. I’d love to chat and help!
P.S. All images used in this post (minus the formulae) were generated by AI. Just thought it was a fun experiment.