“Can you tell me exactly how to measure my marketing ROI?”
You have no idea how many times I’ve heard that question.
In this post, I’ll do my best to provide a simple step-by-step guide, but there isn’t a perfect solution for everyone. However, there are some core concepts and a basic process you can follow to start you on your ROI journey.
But before diving right into the ROI equation, there are a few things you need to do to ensure an insightful analysis.
Decide the questions you need answered
Let’s say a marketer, we’ll call him Dave throughout this post, works at a B2B company. Dave has two main objectives:
1) He needs to justify his marketing budget to his CMO, and
2) He needs to decide where to allocate investments across his marketing mix
Not only does he want to calculate his overall ROI, but Dave also wants to see ROI by marketing channel. Since he knows in order to accomplish this he’ll need channel level data, Dave adds that level of granularity to his initial dataset. Which brings us to metrics.
Align your metrics and dataset structure with your objectives
As marketers, we tend to think in clicks, leads, CPA, CPC, etc. While those metrics are great for campaign management, it’s time to put on your finance hat and think like a CFO.
You’ll need to dive into your lower funnel and financial metrics. I’m talking gross & net revenue, customer acquisition cost (CAC), churn rates, average revenue per account/user (ARPA/ARPU) and lifetime value (LTV). While a spike in lead numbers may get our juices flowing, these are the business metrics that matter to your CMO, CFO and executives.
There are a lot of different ways to determine how to monetize visitor interactions, but this tool (ROI calculation tool) is one way that we use internally at RETRIO to help our clients prioritize opportunities. But the process can obviously get much more complex.
Now let’s get into how to use the tool, which has three key sections:
- Current site behavior. In this section, enter some base-level information about your site and conversion goal. If you are making a change that will impact more than one key conversion or behavior, you fill the entire calculator out separately for each behavior that will be impacted.
- Total average monthly site visits. This is pretty straightforward. Use numbers from last month or the average for the past few months.
- Average monthly success events. Focus on the key behavior you are trying to change. Is it getting more checkouts, generating more signups for a Webcast, or getting more lead-generation forms filled out? Think about what you are trying to achieve from a site change and what your goal of that test or change is. If you are a lead-generation site and you want to increase one type of lead through a change or test, enter the average number of leads you get on a monthly basis in this field.
- Success event conversion rate. This is calculated based on the previous two inputs.
- Enter average value of a success event. This is one of the hard parts: what is the value of one additional behavior to your business? Continuing with the example from above, estimate the value of one additional lead to your business. Consider the closing rate of that lead offline and similar. This is a valuable article on how to “Increase Your Post-Online Conversions.”
- Potential improvement. In this section you must look at scenarios of increasing performance and a given initiative’s cost. With any site there are two key ways to increase the Web channel’s monetization: increase the conversion rate or drive more traffic to the site. You can, of course, increase the value of each conversion, but we aren’t looking to capture that in this view.
- Increase site traffic by X%. Does the initiative or opportunity include driving more traffic to the site? If so, how much?
- Increase site conversion by X%. How much do you estimate you’ll be able to improve that conversion rate? This will be tough to quantify the first few times, so you might want to start with a conservative range for a few different opportunities, then take the average estimated value for each of them. This should be based on what you know about the problem you are trying to solve, understanding the data available to you, and so forth. Again, you will get better at this over time.
- Estimated cost to improve performance. How much will the initiative cost? Consider internal costs as well as any external agency costs. Is it $10,000 or $100,000 or more?
- Estimated impact of site optimization. This is where the rubber meets the road and we can start to see what type of impact any given change will have financially. The information is displayed in a graph and a table. In the table, the tool shows both monthly and annual numbers for each category.
- Current value. This is based on your current traffic, conversion rate you entered, and the value of those behaviors. This is the starting point you want to improve on.
- Estimated future value. Based on increased traffic and/or improved conversion, this shows the estimated future value of the Web behavior you want to improve.
- Incremental value. This simply shows the delta in value from the current to the estimated future value.
- Incremental success events. This indicates the number of incremental success events or conversions based on the information you entered. For example, it might show an additional 1,000 leads per month through this opportunity if you were to act on it.
- ROI. The initiatives ROI is based on the cost to address the opportunity. This should allow you to compare a few different opportunities. Enter different scenarios and see which ones rise to the top in terms of ROI.
Now you have data to answer your burning questions.
You can now tell his CMO that for every $1 in his budget, he can turn it into $1.50 after 12 months. That’s some pretty compelling data to justify your marketing budget.
On top of that, you can look and see which areas of your marketing mix warrant additional resources, and which he should re-evaluate.
Hopefully, you now have a solid basis for understanding marketing ROI. It’s important to remember that this is only the beginning of your ROI journey. The complexities and adaptations you can make to your model are endless, but hopefully this advice helps you start having some data-driven conversations.