Measuring the ROI, or return on investment, of your online marketing campaigns is crucial for any business. You want to focus your time and resources on marketing efforts that work, so this metric can help you determine which ads, messaging, and campaigns get the most engagement and conversions.
There are many ways you can market your brand online – social media, pay-per-click ads, off-page SEO, on-page SEO and more. So, how do you track which one provides the best return? This guide will teach you how to calculate, analyze, and track your online marketing ROI so that you can make strategic decisions.
Keep reading to learn more about how to measure the ROI of your online marketing campaigns!
Online Marketing ROI: The Basics
Before you get started with calculating ROI and adjusting your online marketing strategy, you must understand the basics of what this metric means. Digital marketing ROI refers to how much profit – or loss – your business achieves for each ad campaign.
It is a calculation that divides your total return by the cost of the marketing campaign, so you can get a percentage that tells you how effective the ads were. The larger the return on investment, the better, as it means you need to spend less money on marketing to generate more sales.
You can also use this analysis to help you compare different marketing campaigns. It can be tough to compare social media ads or search engine banners to email campaigns, but the ROI calculation can make the comparison simpler.
This information is invaluable, as it ensures that you spend more time doing what works – and tells you what areas of your marketing strategy are not necessarily worth the investment. Simply put, calculating your online marketing ROI can influence your marketing strategy, spending, and more.
The Importance of Measuring Online Marketing ROI
You may be wondering, why is it so important to measure the return on investment on your online marketing campaigns? There are three primary benefits of calculating your ROI: identifying successful campaigns, driving your marketing strategy, and benchmarking against competitors.
Identify Successful Campaigns
Measuring ROI is key to identifying a successful ad campaign. So, you designed new marketing materials and paid for social media ads and content marketers to promote your product – but how do you know that it actually worked?
When you calculate the return on investment for your online marketing efforts, you can determine whether the project was a success. The goal is to see a positive ROI since you don't want to spend more on the ads than you were able to generate in sales.
Learning what works well can help you improve your ROI over time, as the idea is to minimize costs and optimize the return on investment. If you don’t calculate ROI, you have no way of knowing how much revenue you were able to generate from each marketing campaign – and you might end up spending money on ads that just don’t convert. Best practices for increasing conversion rates on your landing page can be tricky to implement.
Drive your Marketing Strategy
Perhaps the most valuable result of calculating the ROI on your marketing campaigns is that it serves as the foundation for your marketing strategy. After you identify the strategies that were successful – and which ones weren’t – you can fine-tune your marketing strategy and improve your results.
For example, if you had a higher return on social media ads when compared to your PPC campaigns, it can mean that your customers are more likely to convert or make a purchase when they engage with your brand on Facebook or Instagram. As such, it makes sense to shift more resources towards those types of marketing campaigns.
Another way to look at this is that you need to improve your PPC campaigns to increase that ROI. Investing in an underperforming strategy can help you optimize those efforts and find the right balance between ad spend and ROI.
Regardless of which strategy you choose, analyzing your return on investment can help you build your budget and get the best results.
Benchmark Against Your Competitors
Another reason that you need to calculate online marketing ROI is that it will allow you to benchmark your success against your competitors. It can be tough to determine an ideal ROI for your social media or PPC ads. However, comparing it to other brands in your industry can be a perfect place to start.
You may not be able to compare your results to their exact online marketing ROI, but you can usually look at their public financial data to get an estimate. If you notice that your brand is lagging behind, it can be an indicator that it is time to revamp your marketing efforts. On the other hand, if you are leading the industry, then it confirms you are investing your resources in the right campaigns.
How to Calculate It
Now that you know what online marketing ROI is and why it is crucial to track, let’s dive into how you can calculate it. Most brands use the standard digital ROI formula as follows:
Online Marketing ROI = (Net Profit ÷ Online Marketing Campaign Costs) x 100
So, what does this calculation look like in practice? It helps to break down each component so you can gather the right data to appropriately calculate your ROI.
Your net profit can be determined by subtracting your costs from your sales revenue. In the case of online marketing, your costs can be what you pay to boost your posts on social media, or your campaign spends for PPC ads.
When calculating the revenue, it is important that you only attribute sales generated from those ads so that you have a more accurate calculation.
Once you have your net profit, you can divide it by the total marketing costs for that campaign. If you multiply this number by 100, you get a percentage that represents your return on investment.
Let’s look at an example using the following assumptions:
- Net Profit: $1,000
- Total Marketing Cost: $800
In this scenario, you would divide $1,000 by $800 to get 1.25. Next, you would multiply 1.25 by 100 to get an ROI of 125%. You can analyze this number in a few different ways, such as you got a $1.25 profit for every $1 spent on the marketing campaign.
Similarly, you can view marketing ROI as a ratio, and in this example, it would be 1.25:1. In other words, you should expect to earn $1.25 for every $1 that you invest into online ads.
What if you don’t know exactly what your net profit or generated revenue is? You can still calculate your online marketing ROI by analyzing the number of leads. Try using this formula instead:
Online Marketing ROI = (# Leads x Conversion Rate x Average Order Value) – Marketing CostMarketing Cost
As you can see, this option requires more inputs since you also need to calculate the revenue portion. For this formula, you are multiplying the number of leads you generate times your conversion rate.
This will give you a figure that represents the leads you can turn into customers. Multiplying this number by the average order value allows you to estimate the revenue you will generate for the marketing campaign.
You can then take that number and subtract the marketing costs to determine your net profit. From there, simply divide the number by the total marketing cost to calculate your online ad ROI.
Here is another example:
- Leads: 1,000
- Conversion Rate: 40%
- Average Order Value: $50
- Marketing Cost: $2,000
Online Marketing ROI = 1,000 x 40% x $50–$2,000$2,000
Online Marketing ROI = 9
In this scenario, you have an online marketing ROI of 9:1. That means you can expect to profit about $9 for every $1 you invest into that online marketing campaign. Again, this option works well when you are working with leads instead of clear-cut revenue or profit numbers.
What is a Good ROI?
After you complete your calculation, you will likely move on to the next question: what is a good ROI for an online marketing campaign? Unfortunately, there is no simple answer to this question as it will vary by company, industry, and sector. It also relies on unique factors like your business overhead, margins, and other metrics.
A standard measure for a successful marketing campaign is 5:1, or a return of $5 for every $1 you invest. However, some sectors may view an ROI of 3:1 as an excellent measure – it is all a matter of perspective and finding what makes sense for your business.
One of the most effective ways to gauge your ROI is to compare it to your competitors. This will help you identify how your peers are performing too!
Additional Metrics to Track
Measuring the return on investment for your online marketing campaigns is very beneficial, but there are additional metrics you should track to calculate your success in the short term. Here are some examples of KPIs that should factor into your overall ROI metrics:
- Conversion Rates
- Customer Lifetime Value
- Cost Per Lead
- Cost Per Click
Not every lead will convert right away, so these calculations can help you better understand your marketing funnel and improve your ad campaigns in the short term.
Calculating Online Marketing ROI has its Challenges
Although the mathematical formula to calculate online marketing ROI is rather simple, there are several challenges to consider when compiling the data. You may face some difficulties getting an accurate number, so it is important to keep these in mind before you get started.
For starters, it can be challenging to manage an ROI calculation if you have multiple touchpoints throughout the buyer journey. Most customers don't have a linear experience – they may interact with your brand website, connect with you on social media, or speak to a sales associate before they make a purchase.
So, how do you know what part of your marketing efforts caused the conversion? Did they find your brand through a Google search, or did they click on a link they received from your email marketing campaign?
Maybe a target social media ad was the last step they took before finalizing a purchase, but it could have been a blog they read on your site that made them ready to move forward. The solution is to create a process for attributing sales to have consistency in your ROI calculation.
Another difficulty in measuring ROI is choosing the right time to calculate it. Some customers will take longer to convert than others, especially when it comes to email marketing and social selling. Unlike a PPC ad that may convert immediately, you need to identify the appropriate time to calculate ROI for campaigns with a longer lead time.
You can address this challenge by aligning your ROI metrics with your revenue cycle projections. This will allow you to determine the long-term effects of your marketing efforts.