One of the biggest things that business owners and managers ask us about is ROI (Return on Investment). Is digital marketing actually bringing in money? The bottom line to calculate roi is determined by taking your revenue and subtracting the expenses, and then you’re left with profit.
Let us walk you through how to calculate ROI for digital marketing the right way! If you are serious about growing your business – and your profit margin – we are confident we can show you how digital marketing can make a positive impact. We’ve got 3 things for you to keep in mind!
3 Steps on How to Calculate ROI
Set a Conversion Goal & Track Those Conversions
The first steps in calculating your return on investment when it comes to digital marketing is to set some conversion goals and knowing how to track them. Every business across all industries will have different approaches and campaigns for their social media conversion goal, but one thing stands out across the board. All companies will want a customer to take a measurable action that will lead to REAL monetary value. More people taking the steps you want them to (signing up, calling, coming in to the store, ordering online, etc.,) means more profit for you.
Tracking those conversions will obviously vary with your social media platforms and your budget, just like it would for non digital forms of advertising and engagement. Google Analytics and built in trackers like “insights” on Facebook cover most situations, but there are also a lot more sophisticated apps out there for advanced conversion tracking and monitoring.
The main ways to track social media are:
- Conversion Rate
Most of these can be found directly within the platform, or by using a third party app.
Assign a REAL Value to Each Conversion
There main way to calculate the conversion value is by using data your company should already be calculating – the lifetime value of your customer. If you know the LTV (lifetime value) of each customer, you should be able to easily backtrack for conversion value rates.
Do you know the lifetime value of your customer? How much does one customer, on average, spend with your company in their lifetime?
Two Formulas to Note:
Lifetime Transactions x Lifetime Revenue – Lifetime Expenses = Lifetime Value of a Customer
Revenue ÷ Number of Transactions = Average Revenue per Sale
For example, if you are a residential interior designer, and your clients hire you 5 times over 5 years until they eventually stop needing your services, and your average sale value is $500, and you leave yourself a 50% buffer, you know each new customer is worth approximately $1,250.
Let’s take a minute to discuss this in the digital marketing world.
If your lifetime value of a single customer is $1,250 and your conversion tracking has shown you that 1 in every 20 people who sign up for your email subscription becomes a lifetime customer, then the value of getting that email address is $62.50 (1250/20).
Are you still with us? Hang in there!
The second way to calculate the conversion value is by making educated guesses based on past experience. For example, a trusted friend promises you they can get you 1,000 email subscribers. How much would you, a smart and savvy business owner, willing to pay for those signups? $1? $50? Use that value, and revise it when you get a better scope on your incoming data.
QUICK CONVERSION TRACKING TIP:
If you are trying to track particular images or videos, or even for offline conversions, you can direct your visitors to a special URL or have them use a specific promotional code in their order.
Specific landing pages and promotional codes are awesome ways to collect data. If you only advertise a promo code on one platform, you can DIRECTLY see how many people see you on that social platform.
Determine Total Costs
Alright, as smart business people you want to see the numbers realistically. Kevin Whelan from KVNW.com, a B2B Digital Marketing & Strategy Consultant, gives a wonderful example of how a business can actually calculate whether or not digital marketing is worth it. We will summarize it here for you.
Say there is a company who has an average annual revenue of $1,000,000 and their average sale value is $1,000.
They made a goal to acquire 250 new customers over the course of the year and we did the math for their customer LTV, and it comes about to be $3,000.
Let’s say they really help with digital marketing, and they found a marketing company who quoted them around $9,100 per month, or $110,400 ($9,100 x 12 months). They need the works – a new website design, social media management, blog content writing, email marketing, pay-per-click advertising, search engine optimization, and basic graphic design.
This sounds like a lot of money! The real question is, is it worth it? Let’s do the math (read: let’s calculate roi)!
New customers = 250
Lifetime value per customer = $3,000
Total Lifetime Value = 250 x $3,000 = $750,000
Acquisition Cost (price paid to market + find new customers) = $110,400
Grand Total: $750,000 – $110,400 = $639,300
Return on Investment (ROI) = $639,300/110,400 = 5.79 times, or 579%
If it takes them 10 years to get their lifetime value of a client back, that works out to 57.9% return on investment per year.
That means, for every $1 invested in their marketing, they got $5.79 back! Sounds pretty worth it from this side of the screen!
The Bottom Line
A lot of times, when it comes to learning how to calculate ROI for digital marketing, its the lifetime value that counts. Learning how to calculate ROI takes a little patience, and a lot of testing. As long as you have a solid idea of how much each client or customer is worth to your business, that is when the marketing really begins. Too much guessing can lose you money quickly, but calculated testing and experimenting with social platforms can harness awesome results for your business!
If this overwhelming for you to read, or your eyes kind of glazed over during this post, we can help. We work with people who really want their business to grow, and we do the hard work for them. We test, research, develop, manage, and take care of your business for industries all across the board. Digital marketing takes a little focus, and we strive for targeted results.
In an age dominated by digital marketing, you don’t want to get left behind or miss out on great ways to build your profit margin.
Schedule a FREE consultation today and let us show you how we can help your business grow!