A Simple Guide to Marketing ROI

Digital marketing professionals often tout how this metric or that metric is indispensable in achieving success. However, one major issue with this mindset is that not all marketing ROI metrics tell the whole story, and it only gets worse with tunnel vision.

For example, one can boast about boosting a client’s lead generation rate. Impressive, but know that lead generation in this context includes good and bad leads. How much of them were good or bad? How much did the client spend to attract each lead? More importantly – and which is related to our topic today – was it worth it?

At NO-BS Marketplace, we don’t waste time focusing on such metrics. For one, it’s a great way to be distracted from the things that matter to a business. While we do keep an eye on several metrics, it comes down to just one in the end: return on investment (ROI). Here’s a look into ROI and why it should be worth paying attention to.

What is ROI in Digital Marketing?

ROI, according to Investopedia, measures the profitability of an investment. In the context of digital marketing activities, it compares the total revenue generated by a marketing method or marketing strategy with the amount of capital spent on performing it.

A perfect example would be a movie’s box office revenue. Avatar (not to be confused with Avatar: The Last Airbender) cost USD$237 million to produce but grossed at USD$2.923 billion in domestic and international theatres. Using the following marketing ROI formula:

We can determine that the movie achieved an ROI of over 1,100%. This stipulates that the highest-grossing film to date made over USD$11 for every dollar spent on its production, which is impressive by most standards.

Through this example, you can see why ROI is the best metric for an investment’s success. The marketing ROI formula is basic, and the results are easy to comprehend. The film didn’t exactly make USD$11 per dollar of spending, but it gives a good idea of how lucrative it was. Additionally, some analytics tools compute and display ROI in real-time.

What is a Good ROI for Digital Marketing?

Long story short: not 1-to-1 or less, but there’s a catch.

Making a profit is the whole idea of achieving a positive ROI. A ratio of 1-to-1 means you’re making nothing because you’re earning as much from your campaign as you spent on it. Anything less means you’re losing money, which is worse.

Here’s the catch, though. A simple ROI ratio of 2-to-1 doesn’t always mean it’s performing well –so does 3-to-1, 4-to-1, and so on. This trap often lulls business owners (and, to an extent, marketers) into a false sense of confidence. To quote retail magnate John Wanamaker or industrialist Lord Leverhulme (depending on the source):

“Half my advertising spend is wasted. The trouble is, I don’t know which half.”

The marketing sector is a ways away from developing ROI into an exact science. However, most experts say the best approach available to us is comparing the ROI of your current campaign with that of previous ones. This way, you can determine reasonable benchmarks for your next strategy and the several to follow.

How to Measure Digital Marketing Success

The formula for measuring ROI in digital marketing is similar to the one I mentioned earlier. The difference is that there are extra steps before getting to the result.

Let’s set a scene. A window replacement service launched a new campaign to promote its new budget windows. A month into the campaign, it attracted 1,200 leads, 120 of whom decided to buy these windows, some in bulk. Accounting for labour and other services, their sales average $820 per customer.

• Number of leads: 1,200
• Lead-to-customer rate: 120/1,200 = 0.1
• Average sales price: $820
• Current value of investment: $98,400

As for the cost of investment, let’s assume that the business asked NO-BS Marketplace to create the campaign. They bought our second-level SEO and PPC service packages. It may have other expenditures, but let’s limit it to the list below for simplicity’s sake.

• Major City SEO package: $3,000
• Monthly Google Ad spend: $5,000
• Google Ad management fee: $1,000
• Cost of investment: $9,000

With our two values, we can finally determine the campaign’s ROI.

• Net value of investment: $98,400 – $9,000 = $89,400
• Return on investment: ($89,400/$9,000) x 100% = 993%
• Revenue per dollar of ad spend: $9.93

The figure may seem impressive, but as mentioned earlier, it won’t mean much without a benchmark comparison. Let’s say that two months ago, it ran a month-long campaign to promote a previous batch of budget windows. Below are the results.

• Number of leads: 2,800
• Lead-to-conversion rate: 56/2,800 = 0.02
• Average sales price: $850
• Current value of investment: $47,600

Again, NO-BS Marketplace was asked to create and manage the campaign, purchasing the second-level SEO and PPC package.

• Major City SEO Package: $3,000
• Monthly Google Ad spend: $5,000
• Google Ad management fee: $1,000
• Cost of investment: $9,000

Now, let’s find the previous campaign’s ROI.

• Net value of investment: $47,600 – $9,000 = $38,600
• Return on investment: ($38,600/$9,000) x 100% = 429%
• Revenue per dollar of ad spend: $4.29

As you can see, the newer campaign performed better than the older one, even if the latter achieved a higher number of leads and average sales price. Clearly, something worked in the newer campaign, which is worth considering when developing the next one.

Don’t worry if this is too much math to take in one sitting. Most marketing tools can show a campaign’s digital marketing ROI in real-time using the appropriate data points. Some notable examples are Google Analytics, Kissmetrics, and Planful.