Throughout this website I use the term ROI a lot, but what does it actually mean? ROI stands for Return On Investment and in marketing your investment is how much you spend. Working out the return basically means working out exactly what your marketing investment has generated in dollar terms.
Calculating your Return On Marketing Investment (ROMI) uses a relatively simple formula:
For example, if you invested $20,000 into a Google Adwords campaign and it generated sales of $200,000 and from that $200,000 you make $60,000 profit then the return on investment would be as follows:
The ROI could be referred to as a ratio 2:1, for every $1 invested into marketing 2 additional dollars were generated or the ROI could be referred to as a percentage, ie. a 200% return on investment.
A lot of formulas given out to calculate your ROI use your sales revenue and not your gross profit but this formula ignores the other costs involved, ie. in the example above I had $200,000 sales revenue but the products cost $140,000. Calculating the ROI on sales revenue gives misleading data as a marketing source could actually be losing your company money after all other costs are included.
To work out the gross profit for each online marketing source you first need to ensure you have tracking set up correctly – this article will help you to do that. If you get a lot of phone calls then phone tracking is also recommended to help accurately work out your ROI. Once you have tracking in place you can then work out the dollar value of sales being generated and accurately work out your profit, and therefore ROI.
If your website is generating leads it gets a bit more complicated. The fastest way is to work out how many leads it takes you to close a sale on average, using the largest timeframe possible. This requires a lot of work but will give you an accurate picture of how your sales team are performing and may uncover other opportunities to improve your ROI. Once you have worked out the number of leads it takes to close a sale you can then work out the average profit per sale and a rough estimate of the value of each lead to your business.
For example, if a sale is worth $15,000 profit to your business and you invest $20,000 in Google Adwords which generates you 30 leads (webforms or phonecalls) and on average your sales team manage to close 1 sale for every 5 leads that come in, your ROI would be as follows:
Maths is not a fun subject to many, but accurately knowing what profit you are generating from each marketing source is essential to optimising and improving your overall marketing success. Knowing that a marketing source is actually costing you a lot of money can save you a lot of money in the future and can ensure that your most profitable marketing sources get the most attention and budget.