( Sales – Marketing Cost) / Marketing Cost = ROI
Formula for Lead Gen and “Closing Style” Conversions:
Step 1: (# of leads) * (Conversion rate) * (Average Customer Value) = Return
Step 2: Return – Marketing Cost / Marketing Cost
The Importance Of Calculating Marketing ROI
In the marketing world, it can be a struggle to show the value of your efforts in a concrete way.
When a client is spending money on marketing campaigns, they want a clear picture of how the campaign is performing. They want numbers that show it is contributing directly to their business.
This is kind of a textbook marketing concept, but it is really valuable to be about to illustrate that impact with numbers.
Marketing ROI, or ROI in general, it’s just an evaluation statement on return on investment. However there are a few different layers to concept.
Ultimately, it boils down to how do I prove that I have earned my key as a marketing specialist? How do I prove I’m not flushing the client’s money down the toilet?
If you’re in the pay per click arena, or you’re spending money on email marketing, or you’re a marketing specialist, there are some marketing dollars being spent. You want to show that those marketing dollars are moving the needle.
A Lesson About ROI
I was talking to my friend, Robin, who is a pay per click specialist and he was gracious enough to share his insight on ROI.
One of the most powerful things he taught me was how to calculate ROI. This is useful for marketing managers, digital marketers, business owners and absolutely anyone who’s spending either money or effort on marketing.
ROI is not some vanity number. It’s not just some random formula for a vague concept. What we are talking about is measuring the extent to which your marketing efforts are tangibly contributing to the business.
In order to effectively assess your marketing strategy, you need to know how effective your current tactics are.
Calculating ROI Using Examples
I want to offer three quick examples in two in two different industries.
When we are dealing with ecommerce clients, this is pretty easy to measure since there is an actual dollar amount attached to the products being sold.
You can very easily calculate your marketing return from those types of clients. When it gets a bit trickier is when you have a client whose conversion action is by collecting either an email or a phone number. It will take some work to figure out how many of those people are actually converting into a valuable asset aka a customer.
ROI Example 1
We will start with an easy example.
You’re a webmaster of an e commerce site with $5,000 in sales during the last quarter. During the same period, you spent 2,000 to get those sales through paid channels or in marketing budget overall.
To calculate, use the formula: (SALES – SPEND) / SPEND = ROI
In this case: (5,000 – 2,000) / 2,000 = 1.5
With the 1.5 result, you know for every dollar you spend on marketing, you are seeing a return of $1.50. In other words, you are getting a 150% return on the investment.
ROI Example 2
For our next example, you are working with a law firm to generate calls through their website.
To calculate ROI, we have to use the data that we are able to collect. Using website analytics, you can collect things like how many people clicked on a certain button.
For this example, we will use the number of people who clicked on the phone call button on our website. Analytics can’t tell you if that phone call ended up in a sale. We need the client to tell us how many phone calls were received and how many of those led to a sale or a new client for them.
This number can be hard to get, so you want to demonstrate to your client why the numbers are so important in measuring how well the marketing is working.
Convincing your client to track the numbers and share with you is an important step.
You find out that 10 people clicked on the button and your client is able to tell you that 20% of phone calls lead to sales. Each client spends an average of $1,000 with the firm, so that is the figure used for customer value. Here is the formula you will use :
LEADS x CLOSE RATE x CUSTOMER VALUE = SALES
In this case: 10 x .2 x $1,000 = 2,000
So now you can plug in the numbers to our original formula, (SALES – SPEND) / SPEND = ROI.
(2,000 – 750) / 750 = 1.66
This shows a $1.6 return for every one dollar spent, or a 160% ROI.
A Final Example
Using the same law firm, imagine you created a form on the website for a $200 fee and it was clicked 10 times with a 10% conversion rate. The customer value is the same.
Again, use LEADS x CLOSE RATE x CUSTOMER VALUE = SALES
10 x .1 x 1,000 = 1,000
And we can use our ROI formula: (SALES – SPEND) / SPEND = ROI or (1,000 – 200) / 200 = 4
In this case, you showed that for every dollar spent on marketing, you earned your client $4.
That’s a whopping 400% ROI.
Hopefully this has been helpful in determining the value that marketing brings to a client.
The next time you need to prove your value, don’t rely on anecdotes or vague findings, use the real data to show your client the ROI.
This content was created in collaboration with Robin Mannas, founder of Firebrothers Inc. Robin specializes in SEO and SEM. His website is firebrothersinc.com.
Know Your Digital Marketing ROI
Contact Us To Get Beautiful, Clear Marketing Data