Understand ROI in digital marketing

Understand ROI in digital marketing

Return on investment (ROI) is a measure of the profit earned from each investment. Like the bit left over (or profit) that you earn on your portfolio or bank account, it is calculated as a percentage. In simple terms, the ROI formula is:

(return-investment)/investment.

As a percentage it is multiplied by 100.

ROI calculations for marketing campaigns can be complex — you will have many variables on both the profit side and the investment (cost) side. But understanding the formula is essential if you need to produce the best possible results with your marketing investments.

Marketing ROI Formula - the basic formula uses the gross profit for units sold in the campaign and the marketing investment for the campaign. this works in the situation where the data is easily transferred from sales to people. Think of online shopping and you advertise a product, customers turn up and buy products. All sales for that campaign (gross) and the cost of the campaign easily translate into your formula.

Another way to look at this though is via the LTV (Life Time Value) of any customer aquired by a campaign. Ths will be a little harder to translate 1:1. For this to be visible you will need to take a historical approach to data and analytics. Fist you will need to log when the campaign fired, track who came in through the campign and the initial cost of the campaign. Over time you will need to calculate the sales (gross) for the users who came to your site from the campaign.

This better suits websites with long term goals. Subscriptions, repeat orders, multiple sales channels where each month a new product can be offered.

What is the return/profit?

Well this is tricky for all marketers to agree. Typially at Spanscom we break this into 3 bands. Total revenue generated for a campaign (or gross receipts or turnover, depending on your organization type and location, which is simply the top line sales generated from the campaign)

Next is gross profit, or a gross profit estimate, which is revenue minus the cost of goods to produce/deliver a product or service.

Last is Net profit, which is gross profit minus expenses (all profit minus all business costs)

What is marketing costs?

Typically we look for things like creative costs, printing costs, technical costs (such as email platforms, website coding, etc), management time and then cost of sales.

The Alpaca dashboards Spanscom provide are tailored to our users needs making this a visual and interactive experience, as you can see, no one company is the same as the other.

 

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