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How to calculate marketing ROI

November 26, 2018
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BFO-calculate marketing ROI

Clear return on investment (ROI) reporting within a marketing department has been almost as elusive as a unicorn in a forest, and almost as difficult as tracking the fabled Holy Grail!

Marketing departments don’t provide detailed ROI statements! Or do they?

On a weekly, if not daily, basis, marketing departments across all kinds of businesses are being asked by their board or their CEO: “What is the return on investment for our digital marketing activity?” And for some of these departments, the answer might be: “We don’t know.”

In today’s digital analytics world, there is no excuse for not having detailed ROI data for your business, for your website, and for your campaigns.

For large, multi-national corporations (MNC), this problem is most apparent. It is highly likely that an international organization will have multiple websites over different regions, all of which are tracking different metrics, and managed by different marketing teams, teams which may not have regular communication with their international counterparts. As a result, it becomes incredibly difficult and frustrating for international marketing directors to convey the ROI of their different operating units, and the websites that serve them – as data and reporting are unlikely to be fully aligned.

Why is marketing ROI so difficult to measure?

In the past, measuring the effectiveness of your marketing, advertising, and PR activity, even on a small scale, was difficult due to the lack of sophisticated analytics and measurement tools. As a result, many businesses found themselves unable to justify the costs of their marketing activity. However, with the marketing tools available today, you can readily and accurately track the activity at every stage of your sales funnel, and predict how that activity will translate into an eventual sale.

For marketing departments today, the importance of being able to readily provide your marketing’s performance metrics, the conversion ratios, and common conversion paths, and being able to calculate your marketing ROI, is paramount.

But to truly understand how important the ROI of your marketing is to your business, it’s vital that you first establish what your goals are – and develop them in a SMART format (something which we have covered previously) – as well as what metrics you will use to identify your performance in relation to goals, which are inherently your Key Performance Indicators (KPIs).

And, from an international ROI reporting perspective, the importance of developing these goals and agreeing on KPIs cannot be understated. The problem lies in the fact that with scale, comes discord, which becomes a knock-on effect as your regional marketing and sales directors fail to come together to discuss what the business’ goals are, and which metrics are of importance.

Added to the confusion is the multitude of digital channels available for your business to market and sell on. Your prospects will arrive on your website through a variety of online channels: organic search, social media, referrals, email marketing, paid search, display advertising, paid social, events – and having a clear understanding of just how your prospects arrive and which channels help you to generate the most leads (more on that in a later blog) is help to determine ROI.

How to calculate marketing ROI 

  1. Start from the top, not the bottom

The simplest approach to understanding your business’ ROI – even at a large scale – is to see your website as the top of your business’ sales funnel.

In the B2B world, your website meets your prospects – almost invariably – before you do and on that basis, should be seen as the top of your business’ sales funnel.

So, if your analytics is set up to track website visitors – including original source data, clicks, conversions, and their overall activity on your website – then it is not at all unreasonable for you to track a website visitor from the point they arrive on your website, to the point they become a paying customer.

Providing your website is set up in such a fashion and your analytics is able to collect and record such data, you can then, of course, go further and start attributing leads and customers you generate to specific marketing efforts. For example, if the majority of your leads and paying customers are generated via your pay-per-click advertising campaigns, you would want to further invest in that channel – and that’s where lead sources and attribution reporting can be tremendously beneficial.

  1. Understand lead sources and attribution reporting

Lead sources (or original source) will tell you how a contact first arrived on your website – they could have found your website via organic search, referral, social media, email, paid search (PPC), paid social, direct traffic, another campaign or from an offline event or gathering.

Once you know how a contact first arrived on your website, you can then use attribution reporting/ modeling to attribute value to the specific channels (or touch points) involved in the conversion process. For example, perhaps a contact first arrived on your website via organic search but later clicked on a PPC advertisement for one of your products, filled in the landing page form and converted. In this instance, do you attribute the value of the conversion to organic search or to organic search and PPC equally? This is where attribution reporting/ modeling can help.

There are a number of attribution models – each with their own advantages and disadvantages and some more detailed than the others.

  1. Choose an attribution model

Last Click
Last click is the most common attribution model, but also the most inaccurate. It assigns the entirety of the revenue generated to the last customer touch point before a sale.

First Click
First click is the complete opposite of last click. Instead of attributing the final sale to the last customer touch point, it instead allocates it to the first customer touch point. For example, if your prospect arrived on your website through pay-per-click advertising and later makes a purchase on your website, pay-per-click is determined as the method that drove that revenue.

Last Non-Direct Click
With last non-direct click, 100 percent of the conversion value is given to the last channel before converting, unless the channel is direct traffic (URLs typed into a browser).

Linear
Unlike previous models which attribute the value of the sale to a particular channel or touch point, the linear model states that every touch point in the customer journey is equally responsible. Linear attribution is more of an ‘equal’ value system, assigning equal credit to the channels involved in the overall conversion.

Positional
As the path to purchase has become far more complex, evaluating all the touch points involved in the customer journey is essential. The positional model recognizes this and combines first click, last click, and linear to evaluate the value of each touch point. With positional attribution, the first point and the last point are worth a certain percentage, and all the other touch points between have the remaining percentage divided up evenly among them.

Time Decay
With time decay attribution, the touch points closest in time to the eventual sale or conversion get most of the credit. For example, if a customer interacted with your business through social media and email within a few hours of conversion, those channels would receive the most credit. As you go further away from the point of conversion, the other channels involved in the process would gradually receive less and less credit.

Now that you understand how people find your website, the channels involved, and how to assign value to the channels which drive conversions, you should be able to do a simple ROI calculation – for instance:

For x web visits via x channel, you generate, on average, x leads. Of those x leads, x, on average, become paying customers. An average sale equates to x, and the amount you spend on x channel is x.

You then divide your profit by your investment for your ROI percentage. It’s a simple calculation to make but many businesses are unable to get clear ROI reporting due to how their analytics is set up, making ROI difficult to measure.

That concludes our blog on how to measure marketing ROI. If you need help developing ROI reports for your website(s) we can help. Just click here to find out more.

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