How Do I Measure Digital Marketing ROI?
So, you want to know if your marketing is working, eh? Smart marketers always do! After all, if you don't measure your digital marketing return on investment (ROI), it is possible that you are wasting hundreds, thousands, or even millions of dollars on marketing that doesn't work - and not even realize it! As part of our mission to help good companies grow, we want to give you the tools and knowledge you need to put the right systems of measurement in place so you can track your results. Ready? Let's get started!
How to calculate digital marketing ROI
First off, you'll need to do a little bit of math. Here's the formula to calculate ROI for a digital marketing campaign:
The basic ROI calculation is:
ROI = (Net Profit/Total Cost)*100
To figure out your net profit, you subtract the amount you spent on the campaign from the total amount of dollars the campaign brought in. This means in order to be accurate you will need a way to track Revenue Attribution so you know which marketing activities are leading to sales. More on that later. For now, let's make the formula a little easier to apply:
Our formula to calculate Digital Marketing ROI is:
ROI = (Sales Growth - Cost of the Campaign Cost/Cost of the Campaign)*100
Let's look at an example. Let's say you ran a social media ad. You spent $500 for an agency to plan and execute the campaign strategy and create the digital assets, then you spent $500 on clicks. That's a total cost of $1,000 for the campaign. You ran the campaign for one week, and you generated $3,000 worth of new business. What is your ROI? The formula would be calculated as follows:
Example of Digital Marketing ROI:
ROI = ($3,000 - $1,000/$1,000)*100
*ROI = 200%
*The ROI is always expressed as a percentage.
Now, if you're an established business you already know: A return of 200% in 7 days is quite lucrative, and returns like this are very hard to come by. Few investment vehicles on the entire planet offer returns this good. Stocks don't. Bonds? Forget it. Bitcoin? For 1 in a million, perhaps. For most of us though - not a chance.
This is why people risk everything to run a business. It can be compared to having a magical machine in your office that prints cash. If you have a machine where you can put in $1,000 and in seven days take out $3,000, you are going to want to repeat this is as many times as you can for as long as you can. This is the key to growing your business titan size. But it, of course, is not an easy feat. No, in fact it is extremely difficult to do. Don't get your hopes up. However, it is not impossible. In fact, building growth machines like this is what I do for a living. I've seen it done many times. It's friggin' awesome. So maybe DO get your hopes up!
The more you improve your product, your branding, and your conversion rate, the more you can consistently generate amazing returns on your money.
Keep in mind that your ROI is not the same thing as profit. if you have a purely digital business, your ROI will more closely resemble your profit margins. However, the more overhead your business has, the more those expenses will erode away at your profit margins.
Got all that? Good. Now what? Now that we know how to calculate our digital marketing ROI, what do we do with it?
Use ROI for Digital Marketing Experimentation
Knowing the ROI is more than just a simple method of making sure you didn't lose any money on your campaign. You can now compare this number to other campaigns or, better yet, a slight variation of the same campaign. For the best results, repeat the campaign again, and change one thing. It doesn't matter what thing you change, as long as it's only one thing.
Now calculate the ROI and compare your number to the first campaign. Is it better? Great! That one thing you changed is a keeper. Make sure you include that one thing every single time. Maybe your ROI was worse the second time. Great! Now you know what not to do. Never, ever, ever, ever, ever do that thing again. Knowing what not to do can be just as valuable, even more so, as knowing what to do.
This process is known as experimentation, and it is one of the greatest things about digital marketing. Why? Because it's science! As you keep repeating these experiments, tracking your ROI, learning what to do, learning what not to do, recording your data, eventually you're going to have everything about your campaign so dialed in that everyone who sees your campaign and can convert, will convert. Your growth machine is now complete. Turn it on, feed it as much money as you can because you know it's just going to give you a solid return every single time.
Other Digital Marketing Metrics you Should be Tracking
ROI is not the only metric you need to track in order to get a clear understanding of how well your marketing machine is performing.
You would't drive across the country and while staring only at your fuel gauge, right? No, you would also need to look at other gauges on your dashboard, but more importantly your front windshield and your rearview mirror. The same is true in marketing; to get where you're going you need to measure several data points and track them as you go.
Here's a list of other digital marketing KPIs you should be looking at.
Unique Monthly Visitors. How much traffic is coming to your site? This KPI lets you know how many people clicked through to your website in a month. Without traffic, not much else happens in digital marketing, so it's key to understand which factors impact traffic the most. It is helpful to segment this data by source of traffic, such as organic, paid, or social, because each traffic source will require a different strategy. If you discover that one stream of traffic in particular performs terribly, it may be an indication that you need to focus on other sources of traffic. For example, if people coming from social media
Cost Per Lead (CPL) You should know how much it costs to bring in each lead. If you are doing Pay Per Click ads in Google Ads, this metric is automatically calculated for you. Tracking with other forms of digital marketing can become a bit complicated, but this is a basic component of your Revenue Attribution strategy.
Cost Per Acquisition (CPA OR CAC) How much do you spend to acquire customers? This goes one step beyond your Cost Per Lead and tells you how much it costs you to acquire one new customer. Your Acquisition Cost is calculated by dividing your total marketing spend by the number of acquired customers. Make it a priority to work on decreasing this cost by making your marketing lean, efficient and effective.
Customer Lifetime Value (LTV). How valuable are your customers? What dollar amount does each new customer represent for your business? The customer lifetime value can answer this question. This KPI is one of the most important metrics a business can know, and you should know yours intimately. Used in conjunction with your CPA and CPL, your LTV can give you a great snapshot of the overall viability of your business model.
Organic Search Ranking. This is not one KPI but several, because each keyword will rank differently. You should be tracking your high value keywords, but also your brand keywords to know how many people are searching specifically for your brand. Another good SEO metric is to track your Average Position. This metric measures your average search result page ranking for your targeted keywords. Use Google Analytics to calculate this number for organic search. The higher your ranking, the more clicks, revenue, and ROI to your website, which translate into higher revenue and ROI.
There are dozens more, if not hundreds of important Digital Marketing KPIs you should be looking at, such as:
- Social Media Engagement
- Conversion Rates
- Newsletter Subscribers
- Email Open Rates
- Click-through rates
- Revenue Attribution
And the last one on that list, Revenue Attribution, is so important we are going to devote the rest of this post talking about it.
Setting up your Revenue Attribution Tracking System
Revenue Attribution is the ability to look at an individual sale and know precisely which digital marketing activity was responsible for bringing in those dollars. If you don't track this, you're going to rely on guesswork and assumptions much of the time, which is not very scientific. If you are going to build a growth machine, please, let it be a concoction of sophistication and elegance. Don't just cobble together some loudly clanging monstrosity that pollutes the atmosphere.
If you don't set up a system that will give you a clear picture of what works and what doesn't, you're just making a hard job even more difficult.
Here's a list of basic tools you'll need in order to start tracking Revenue Attribution.
- HubSpot CRM
- Google Analytics
- Google Analytics’ Model Comparison Tool
- Google's UTM Builder
Let's look at each of these a bit more closely.
You'll need a great CRM to keep track of all of your customer data. HubSpot is the top of the line CRM for Digital Marketing.
You'll need to track your users' behavior and set up goals so you can measure conversions. Google Analytics can track all data that comes through your website.
If you run a website, Google Analytics is simply a must-have tool. It helps you to track every source of traffic to your website pages. Some important metrics you get from your Google Analytics dashboard are:
- Page views
- Bounce rates
- Visitors location
- Source of traffic
- Page value
- Conversion goals tracking
- Assisted conversion value
Learn More: How to set up goals in Google Analytics
Not only does this type of data help you calculate your conversion rate and ultimately your ROI, it also gives you tremendous insights into which pages on your website are particularly effective, and which ones are in need of serious improvement.
By frequently analyzing the data in Google Analytics, you can improve your website over time, helping you improve your ROI and give you an advantage over your competitors.
Once you become a Google Analytics Power User, you can start using some of the more powerful features, such as the Google Analytics Model Comparison Tool
Google Analytics Model Comparison Tool
The Model Comparison tool is actually a part of Google Analytics, but it's so powerful we felt it warranted some special attention.
The tool can help you solve problems and answer questions digital marketing experts typically face, such as:
- How do I make my PPC campaigns perform better?
- What happens if I change my display advertising budget? Will it impact sales on my website?
- Should I be investing more into my Search Engine Optimization (SEO) campaign, or less?
- If I do invest in more SEO, what will be the financial impact to my business?
Learn More: What is the Google Analytics Model Comparison Tool?
Google's UTM Builder
You'll need to give each marketing campaign a unique ID in order to credit the revenue to the attributable source.
Learn More: How to use Google's UTM Builder to Track Digital Marketing Campaigns
Take a Deep Dive into Revenue Attribution
The world of Revenue Attribution is much more amazing and dynamic than we've mentioned here, but since this a post about measuring digital marketing ROI, we stayed in the shallow end of the pool this time.
If you think about it, a digital campaign can have several touch points and a much longer cycle than just seven days. For example: What if the campaign started with our social media ad like in our example above, but the prospect didn't convert right away. Instead, they downloaded a freebie and opted in to your email marketing drip campaign. After 4 emails, they clicked on an offer that had a limited time coupon code. Which marketing activity gets credit for the sale? Was it the original ad on social media? Was it the freebie? Was it the landing page that contained the freebie? Was it the one of the emails? Or was it the coupon code?
Then, there are still more questions like, "Does this change my ROI?" You bet it does! If 5 weeks later, another $1,000 sale comes in from your original marketing campaign, your ROI just improved from 200% to 300%!
Read our Ultimate Guide to Revenue Attribution if you want to take a deep dive into this topic and learn all about how to handle revenue attribution that spans all types of digital marketing campaigns. We'll cover things like Attribution Models, Channel Optimization, and Dashboards, to name a few.